Businesses get access to different financing options to fund their operations and allow them to purchase assets.
But different options come with different requirements, such as credit score, repayment terms, and upfront costs. Often, this leaves small businesses and startups on the back foot as they struggle to meet the prerequisites of traditional financing options.
Asset financing is a good alternative. It gives businesses access to the necessary funds without committing to a long-term loan or depleting their savings. It’s an increasingly popular choice for entrepreneurs and small-time firms alike, allowing them to purchase essential assets without taking on significant debt.
Interested? This article will discuss how asset financing works in detail.
What Is Asset Financing?
Asset financing is a funding option businesses can use to purchase essential assets for their operations, such as vehicles, machinery, and other equipment. They get access to and use the said assets without paying them upfront. Instead, they pay the lending company for the assets in installments over a specific period with interest added.
Such lending terms ensure that businesses are not affected by cash flow problems due to purchasing costly equipment.
How Does Asset Financing Work?
When businesses need to purchase an asset, they can apply for a loan from a financial institution such as a bank or large company. The asset financing process isn’t complicated and involves the following steps:
- Provide details about the business, such as the company number, business number, name, and address.
- Provide proof of residence, such as VISA or utility bills to prove the business owner’s identity.
- Provide the details of the asset to be financed, such as its type, cost, and specifications.
- Submit proof of income, such as bank and financial statements.
The lender reviews their application and assesses the value of the asset. Based on that, they will decide how much to lend and what repayment terms to offer.
Usually, businesses are expected to put down some form of collateral as security. It could be in cash or another asset, such as property or equipment. At the end of the loan term, the business can either assume ownership of the asset, give it back to the lender, or purchase it at a lower fee. The terms will differ depending on the type of asset financing and the initial arrangements.
Types Of Asset Financing
Asset financing comes in many types, though they fall into two primary forms: leasing or hire purchase agreements.
Here’s a breakdown of the most common ones:
- Hire Purchase
A hire purchase agreement is a financing option that allows businesses to get an asset and pay for it in installments, usually for one to five years. The assets will appear on the business’s balance sheet as they get it in full at the end of the repayment period.
The insurance and maintenance responsibility lies with the borrower in a hire purchase loan.
- Operating Leasing
Businesses acquire the use of an asset over a fixed period and make payments during that time. Ownership remains with the lender, and at the end of the lease term, businesses can either extend it or return it. However, you can’t purchase the asset from the lender.
In this option, the responsibility for maintenance and insurance rests on the lender. It’s a less costly option because your business only pays for the calculated value of the asset over a specific period.
- Equipment Leasing
The lending company will purchase your business’s equipment and rent it to you for a specific period. However, you’ll be required to pay the first month’s rent upfront, then spread the other amount across the lease period. It’s an ideal option for people looking to spend less on upfront costs but still obtain essential equipment.
At the loan term’s end, businesses can purchase the equipment, increase the lease period, or return it. Additionally, the lending company will assume complete maintenance and insurance responsibility during the said time.
- Contract Hire
This is a specific financing option for vehicles needed by businesses. The vehicle will remain in the lender’s ownership, but the borrower can use it for as long as they make timely payments. The car’s servicing, insurance, and disposal will be on the lender. Your business can’t purchase the vehicle at the end of the lease period.
- Finance Leasing
Also called a capital lease, it’s a long-term agreement allowing businesses to use the asset financed throughout their lifetime. It requires a large upfront payment, and you’ll get the title or ownership of the asset after a specific period. Insurance and maintenance are also your responsibility during the loan term.
Once the lender receives about 90% of the payments, the asset is sold. You also get a percentage of the value recouped after selling. However, your business cannot buy the asset from the lender.
- Asset Refinance
It’s a loan option for businesses with existing assets that need quick working capital. They can use the asset as collateral and get a loan from a lender. This allows them to free up some cash initially used to purchase the equipment and use it for other purposes, such as expanding their operations.
Benefits Of Asset Financing
Asset financing has numerous benefits that many businesses needing help to expand can rely on. Here are some of them:
- You can maintain cash flow: Your enterprise gets the financial assistance it needs immediately without struggling with an upfront fee. Therefore, you don’t have to gut your monthly budget by allocating a certain amount for asset acquisition.
- The lender maintains the assets: The lender is responsible for maintenance and insurance, so you can use the assets without worrying about extra costs.
- The risk of depreciation is with the lender: Businesses don’t have to worry about the assets losing value while they use them. Often, the provider retains ownership of them over the lease period. Therefore, you only pay for the value you use.
If you have trouble making key upgrades for your business, this may be what you want.
Easy, Smart Saves
Asset financing is ideal for businesses that need assets but don’t have enough capital to purchase them or don’t want to hurt their cash flow. It can help small companies and startups keep up with ever-changing technology and remain competitive.
It’s best to read through the terms of any asset financing agreement before committing to it, as they vary from lender to lender. Call the experts to learn more.