How asset finance works
Asset finance is a means of acquiring assets for your business without using existing business capital. The assets are used as security for the loan, which means in many cases, the asset finance does not impact your business’ other credit lines.
If you have the right sort of business, asset finance can be a viable alternative to more traditional forms of lending. So it might pay to consider this option when you’re looking into new financing arrangements.
Asset rental is an alternative to asset finance. In this case, the financier purchases the asset and leases it to your business. This may be appropriate for assets that quickly depreciate in value or need frequent upgrading, such as computers.
Who might consider asset finance
Businesses with expensive equipment requirements, particularly those that require equipment to help their business grow, can benefit from asset finance.
Since the terms of asset finance are often more flexible than a traditional lending product (such as a loan), it has the potential to help businesses with seasonal fluctuations in their cash flow.
Benefits of asset finance
There are a few different reasons why your business might benefit from asset finance.
- In most cases, the asset being purchased will provide the loan security, allowing your remaining assets to be used for other credit lines.
- The asset finance can be tailored to match the life of the asset and payments can be scheduled to align with its ability to generate cash flows for your business.
- Similarly, loan repayments can also be structured to match seasonal variations in your business’ cash flow.
Disadvantages of asset finance
While asset finance can be beneficial, there are some potential downsides and risks:
- Using the asset as loan security means there’s a risk you'll lose important assets needed to run your business
- The value of assets can vary and will generally depreciate in value over time – this may leave your business with an asset that’s worth less than you planned
- If long-term funding is your goal, there may be other more effective options.
Assets you might consider finance for
A diverse range of assets could be used, such as machinery, equipment, and even buildings.
Types of assets commonly considered for asset finance:
- Manufacturing plants
- Helicopters
- Jet planes
- Equipment for mining, construction, and technology industries.
Difference between a loan and asset finance
The main difference between asset finance and a standard loan is the first is secured, and the second is (traditionally) not.
Business and personal loans are more likely to be unsecured, which means they don’t require an asset as security.
How to decide if asset finance is right for you
Every business has unique financial needs, so it’s important to seek advice on the best financing option for you depending on your goals.
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