Asset financing means borrowing money from a financial institution using the business’s balance sheet assets, such as account receivables, short-term investments, stocks and inventory. As opposed to traditional financing, asset financing is used for short-term corporate needs like paying employees’ salaries or buying raw materials.
With asset financing, you can avoid hefty upfront payments when acquiring business assets, allowing you to maintain the cash flow in your enterprise, as maintenance and repair costs are typically transferred to the lender.
Asset finance in Australia is easy to find because several reputable institutions offer such services. While asset finance seems straightforward, it’s best to consult a professional to help you manage negotiations and get the most out of deals with lending institutions.
If you plan to apply for asset financing soon, here’s a comprehensive guide to assist you in making informed decisions.
Advantages Of Asset Financing
There are several benefits of using asset financing for small businesses. By familiarizing yourself with them, you can maximize your cash flow and financing options. Here are some notable advantages.
- Asset financing is a fast and flexible way of getting funds.
- You’ll be in a position to continue controlling your working capital.
- It’s easy to maintain cash flow management when making monthly instalment payments.
- You can use the money for business growth, such as purchasing modern equipment.
- The interest rate in asset financing is fixed.
- In most types of asset financing, assets’ maintenance and servicing are the lender’s responsibility.
- You can make more money for the business through asset resale.
- You can circumvent the depreciation and obsolescence of assets.
Asset financing allows you to focus time and money on the development of the business because instalment payments are more manageable and can be negotiated to fit your needs and capacities.
Disadvantages Of Asset Financing
While asset financing is a great way to meet immediate financial needs, you must be wary of its downsides. Here are some disadvantages that you should consider.
- If you default in payment, you’ll likely lose the asset and other prior payments.
- Asset financing is not a long-term financing solution, especially for small businesses.
- You may pay more for an asset in the long run than an upfront payment because of the accrued interest.
- Some assets’ value may decrease significantly during the repayment period.
- In cases where there’s no ownership option, you’ll pay a lot of money for an asset you’ll never own.
Some of these disadvantages can be financially crippling to your small business. Therefore, consult a professional to advise you on the best financing option for your small business.
Types Of Asset Financing
By understanding the benefits and downsides of each type of asset financing, you can choose one suitable for your corporate needs.
- Hire Purchase
In a hire purchase, you can buy an expensive business asset by securing a small down payment and paying the rest of the amount in manageable instalments. Unlike traditional instalment plans, hire purchase only allows you to legally own the asset once the final instalment payment is made.
For instance, if you’re buying equipment such as a landfill compactor, you will be required to pay 10 percent of the total price and make monthly payments for five years for the remaining amount. Once the payment is complete, the equipment becomes yours legally. A significant advantage of hire purchases is using the equipment while paying the instalments.
You can agree on a reasonable payment period with the lender. In most cases, the time can be between one to six years, depending on the asset’s value. Remember that, in a hire purchase agreement, you must ensure that you’re paying all the instalments on time because a default can result in losing the asset.
- Finance Lease
A finance lease allows you to rent a business asset for a particular period while the lender legally owns it. Once you enter into this agreement, you can absorb it into your ledger as a fixed asset and become responsible for the rewards and risks associated with the ownership of the business asset. This means that damages, issues, or excess mileage become your responsibility. At the end of the lease, you are expected to sell the car to a third party to settle the contract with the lessor through a balloon payment.
This option might be the best for your small business in getting assets such as vehicles and vans in situations where you can’t get a contract hire. One of the advantages of getting a finance lease is that it offers flexibility and tax benefits. Moreover, with this option, you can spend less money than making an outright purchase.
- Contract Hire
Contract hire is often the best choice for asset financing if your small business is a sole proprietorship, a partnership, or a limited liability company that needs assets such as vehicles or machinery. It is very similar to a finance lease; however, in this case, you’ll have to return the business asset in near-perfect condition at the end of the contract.
While you don’t get to own the asset, you can use it throughout the agreement. One advantage is you won’t be burdened with maintaining and servicing the vehicle or machinery, as this is the lessor’s responsibility. Additionally, you are eligible to claim tax deductions because contract hires are considered an expense.
Through contract hire, you can focus the cash flow on growing the business while transferring the financial risks of owning an asset to the lender. Hence, you can run small business operations while cutting the costs of owning vehicles and machinery.
- Asset Refinance
Asset refinancing allows you to borrow from a new lender to cover the payments you must make on an existing contract. Under this agreement, the new lender pays off the original lender and provides a lump sum based on your equity. For example, if you purchase a vehicle for the business through hire purchase and have paid USD$10,000 already, you can get an asset finance of up to USD$10,000 with that vehicle as security.
You can also get asset refinancing by selling an asset, such as a vehicle, to a finance provider and then leasing it from them. Depending on the agreed terms, you’ll make payments during the leasing period. This means you’ll have funds from the sale and can continue using the asset throughout the lease period while paying only a small amount.
Eligible Assets
For assets to be eligible for corporate loans, they must be durable, identifiable, moveable, and saleable. Hard assets, such as vehicles, machinery, and plant equipment, are often eligible for asset financing for a small business.
Some financial institutions can also accept soft assets, such as software packages, information technology and communication equipment, or intellectual capital. If you are unsure if your assets are qualified, you can consult a financial professional to assist you throughout the asset financing process.
Factors To Consider When Choosing An Asset Financing Provider
When choosing a suitable asset financing provider for your business, it is essential to consider important factors such as those listed below.
- Experience And Background: Make sure you select an asset financing company with extensive experience in the sector you are dealing with. Find out how long they have been in business and what type of transactions they specialize in. Also, research their financial stability and reputation so you will avoid problems.
- Lender Reputation: Consider the lender’s reputation and read reviews from other borrowers. You want to work with a reliable, trustworthy lender with a good track record of working with borrowers.
- Loan Term: The loan term length can affect the interest you pay and your monthly payments. Longer loan terms can accommodate lower monthly instalments, meaning you may pay much higher interest in sum. Remember to choose an option compatible with your business’s financial capacity.
- Interest Rate: The interest rate you are offered will affect the total cost of borrowing. Comparing rates from multiple lenders is best to find the best deal. If you need help selecting one, you can hire a broker to do the tedious work for you.
- Additional Fees: Lenders may charge various fees, such as application fees, processing fees, and prepayment penalties. Ensure you understand all the costs of the loan before signing the contract.
- Customer Service: Consider the customer service offered by the asset financing company. Make sure they are willing to answer any questions or concerns you have in a timely manner. On top of this, you can ask around for customer reviews and feedback on the company’s services.
- Cash Flow: Consider how the monthly payments will fit into your business’s cash flow. You don’t want to take on a loan you can’t afford to repay.
- Use Of Funds: Lenders may want to know how you plan to use the funds from the loan. Ensure you have a clear plan for how the asset will generate revenue for your business.
By considering these relevant factors, you can ascertain that the asset financing company you choose can benefit your business significantly.
Conclusion
Asset financing is an excellent option for acquiring assets for your small business without spending much money upfront. While it’s a great idea to use asset financing for funding and redirecting the capital to other business needs, it can also affect the business if not properly handled. Therefore, consulting a professional before acquiring asset financing is essential to determine the best option that meets your business needs.
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