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To generate working capital or to meet specific short-term cash needs, small businesses may use certain short-term assets as collateral for commercial loans. The most common types of asset-based financing are the following:
- Accounts receivable financing uses the receivables as collateral. As the business collects the receivables, the proceeds are used to repay the loan or line of credit.
- Inventory financing is a similar type of loan, using inventory as collateral.
- Factoring is a process whereby accounts receivable are actually sold to a third party (the factor) for a discount price, after which the factor takes on the job of collections.