Do you have all the assets your business needs, including equipment, vehicles, property, and machinery? If not, this might be the right time to acquire all of them. However, do you have the means to purchase them?
Assets can be expensive, especially when it comes to high-value ones like equipment, company vehicles, and specialized machinery. If that’s the case, you might want to consider applying for a loan. This is where asset financing comes in.
Asset financing is a type of loan that works by spreading the cost of purchasing or renting equipment, machinery, property, and vehicles over time. This will help you buy the assets you need, even if you lack the means to purchase those assets upfront.
If you want to know how asset financing can help you purchase company cars, click here for more information, especially if you’re running a business in Australia. Also, if you want to learn more about asset financing, this post may help.
How Does Asset Financing Work?
Asset financing is a loan offered by banking institutions, lenders, machinery brokers, or equipment dealers.
If your business needs a physical asset, you may consult a leasing company that can buy the asset you need on your behalf. Then, you can use it over a pre-defined period, according to the contract you signed with the leasing company.
Like any other loan, you must prove you have the means to make term payments at the right time. Also, your credit scores will be taken into consideration. Your credit rating must be high enough to ensure that your application will be approved.
Once the application has been approved, it’s time to focus on paying back the lender in installments over a definite period. Leasing contracts are typically under fixed interest rates.
Furthermore, you may be able to purchase the asset you hired at the end of the contract at a smaller price. Also, you may be allowed to upgrade or continue to lease, depending on the conditions of the agreement.
What Assets Can You Asset Finance?
There are two types of business assets for asset financing: hard assets and soft assets.
Hard assets are tangible and high-value objects. These include tractors, specialized machinery, highly-advanced devices, manufacturing equipment, and real estate properties.
Soft assets are items characterized by a low resale value by the end of the contract. These include IT equipment, security systems, vending machines, IT software, catering equipment, and furniture.
What Are The Different Types Of Asset Financing?
Below are the different types of asset financing you might want to consider:
- Vehicle Asset Financing
As the name implies, this only applies to company cars. The lending company will purchase the vehicle you need. Then, you have to pay them back in installments. The lending company shoulders the maintenance costs until the end of the finance agreement.
- Equipment Leasing
Equipment leasing is similar to how vehicle asset financing works; however, the asset is leased, not purchased. This makes it ideal for high-value assets because it only requires a fraction of the cost. The leasing company shoulders the maintenance costs.
Depending on the agreement, you may be able to purchase the asset at a smaller price, renew the leasing contract, or simply return it to the leasing company.
- Operating Leasing
This is similar to how people rent an apartment. You don’t have to pay the entire asset value, only the calculated cost. That’s because you’re only renting machinery in a period shorter than its pre-established lifespan.
This is a cheaper alternative to equipment leasing. The leasing company also shoulders the maintenance costs. Also, you need to return the asset to the lender by the end of the leasing contract.
- Hire Purchase
This is similar to how credit cards work. It spreads the cost of an asset over a specified term. Once you’ve completed the payment, the asset will be yours.
- Finance Leasing
Finance leasing, or capital lease, is a long-term contract between you and the leasing company. The leasing period may vary depending on the lifetime value of the asset. This will give you the full right to use the asset, but you have to shoulder its maintenance and servicing costs.
At the end of the contract, or when you’ve paid at least 90% of the asset’s total lifetime value, the leasing company might give you a share or a percentage once they’ve sold the asset.
- Asset Refinancing
This is a different kind of loan. It uses the physical assets you partly own to unlock cash your company needs. Keep in mind that the asset must be removable, and the amount you can borrow will depend on the current value of your asset.
Once everything has been settled, pay the lender in installments over a specified period. If you fail to complete the necessary payment, the lender will take back the asset to compensate for the money you didn’t pay.
What Are The Pros And Cons Of Asset Financing?
Before you make a decision, it’s important to understand the advantages and disadvantages of asset financing. In this way, you won’t be surprised if something happens before, during, or after the payment period.
Here are the pros of asset financing:
- You don’t have to pay high upfront costs to purchase high-value assets.
- Installments are fixed, helping you create a long-term budget plan.
- The lender will shoulder all the maintenance and servicing fees.
- Depreciation risks will fall to the lender, as well as the responsibility to replace the asset if it malfunctions within the payment period.
- You’ll have extra working capital you can use elsewhere.
- Asset financing is a cheaper alternative to high-interest financial solutions, such as bank loans and other credit institutions.
On the other hand, here are the cons of asset financing:
- Not all forms of damage are covered by the servicing and maintenance provided by the leasing company.
- The leasing company may take back the asset if you fail or miss a payment.
- Contract hire asset financing means paying for an asset you’ll never own.
- Terms or loans not longer than a year may not be possible.
- Asset financing is more expensive than purchasing equipment upfront due to interest rates.
- The lender will investigate your credit rating before approving your loan application.
Understanding these pros and cons will help you decide whether asset financing can help your business.
Asset financing can help you purchase or lease the asset your business needs by spreading the cost over a specific period. It’s a cheaper alternative compared to bank and credit loans. However, your credit standing will be investigated by the lending institution. Make sure to understand how asset financing works to decide whether it’s the right financing option for your business.