Asset Financing

  

Asset financing occurs when a business uses its assets to obtain a loan. Usually, a loan is granted after a business proves its income, has an established, and good, credit history, and all that jazz. This type of financing simply concentrates on what assets the business is showing on their inventory, accounts receivable and investments.

It's sort of like taking a personal loan on your house...you are offering the bank the right to take your house if you default. In this case, it's a business offering their assets in a similar way. This type of financing is especially popular with smaller businesses or those with more stuff than credit.

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Finance: What is the Process of a Bank L...107 Views

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finance a la shmoop. what is the process of a bank loaning money ? alright well

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there are two key factors a bank focuses on to determine the likelihood and terms

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in your getting dough from them. alright one can you afford to pay the loan back? [ man in office speaks to camera]

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like what do you do for a living? how much do you make? is it likely you'll

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still be employed after the next economic downturn? you know stuff like

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that and then there's two. if you don't pay back the loan you promise to pay

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back then which of your assets can they take from you, so that they get their

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money into the interest you were supposed to pay back .okay example time [Man carries money in front of a for sale sign]

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you're buying a house first one. you scrimped you save and now you think you

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can afford this half-million dollar home in palo alto. and that's what half a

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million bucks buys you here. well you have 50 grand in savings ready to put

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down on the house, and you have a nice job as a personal trainer to the stars [man smiling in a gym]

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of Silicon Valley, they look a little different from the stars of Hollywood. so

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yeah you'll never be out of work. you make about 70 grand a year but it's all

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as an individual contractor, so you have great periods of time where you make

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bank and then months where you make a whole lot of nothing. well after taxes on

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average your seventy K is about 50 K which is all you've got to your name. you [math equation]

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thought you'd put 10% down, but didn't realize that you'd have to pay real

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estate taxes in advance, and then other closing costs so you really needed

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$60,000 but the bank wants your business

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mainly because, well, their biggest [businessman talks to man in gym]

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customers are your clients. prevailing interest rates on mortgages are 6% but

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you're not exactly a Bill Gates credit risk, so your cost of interest will be

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higher. they quote you an 8% mortgage rate if you put 20% down on the house.

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but you don't have 20% to put down. you have way less, which means more risk to

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the bank,and lending you the money meaning it's higher risk that they don't [equations shown]

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get paid back, so they'll charge you more for renting the money from them. so the

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price they charge you is 10% interest to rent the money because well you have to

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pay for insurance, or PMI. that covers you if you don't pay them back. and yes that

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sounds harsh and cruel, but well welcome to the real world. so you're

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thinking that you have a loan of 460,000 dollars that extra 10 grand covers

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closing costs and taxes and other things like maybe a little furniture a place to

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sleep on. on 10 percent interest you'll pay 46 thousand dollars a year just in [equations]

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interest. well essentially all of that interest is directly tax-deductible so

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instead of your seventy thousand dollars being fifty thousand after taxes, as far

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as the IRS is concerned ,you no longer make seventy thousand dollars you make

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seventy thousand dollars minus forty six thousand dollars, or just twenty four

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grand a year ,and your taxes on that are like that two grand maybe even a little

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less .you almost qualify for food stamps. and that's good you might need them, [man chews on food stamps]

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because two grand will just barely pay for the food you'll need to, you know

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live. so the bank just barely passes you to qualify for this loan after checking

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to be sure that you know you've never had a missed payment on a credit card, or

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any other loan, or had any other issues like a DUI or some criminal thing that

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would give any lender a cause to pause. so the above is all about your ability [checklist shown]

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to pay that was number one. right number two what comes next is all about the

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risk to the bank. you bought a home in a very active real estate market. the bank

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presumes that they can always sell the home but the home is doubled in value in

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the last three years, and the bank knows that this rate of appreciation is not

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normal. so there's a lot of risk if the home drops in volume 30 40 maybe even 50

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percent in the short run so there is a scenario where the home you just bought

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for five hundred grand ends up selling for 300 grand less 20 [boxes and for sale sign]

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grand in commissions and costs and that's only 280 G's. well the bank loaned

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you four hundred sixty thousand dollars and in this scenario you'd of course

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lose the fifty thousand dollars you put down at your down payment, but the bank

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would then lose a hundred eighty thousand dollars as well. and you know

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banks don't like to lose money. at least the ones that do don't stay in business

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very long. yeah. so that's the process pay your loans. [ group smiles in front of Christmas tree]

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