As part of your research into business funding and loans, you might have come across the terms ‘asset finance’ and ‘personal loans’. Whether you find the differences between the two confusing or are not quite sure which form of finance and funding is right for you, this guide is here to help you understand everything you need to know to get started.
Asset Finance: what is it?
Asset finance refers to the practice of using a company’s assets (as listed on their balance sheets) as security to access working capital. In other words, as a business, you’d be borrowing money against the value of your currently owned assets, such as investments or inventory.
Asset finance is used by businesses of all sizes to help fund growth by leveraging that which they have now for that which they need for the future.
On a practical level, this form of finance involves a regular payment rather than paying the entire cost of the asset upfront.
What can be used as security?
Basically, any investments, equipment, or machinery listed on your balance sheet assets can be used. This can include:
- Inventory
- Vehicles
- Equipment
- Machinery
- Buildings
- Investment holdings
The value of your particular aspects will determine the amount of funding which you are eligible to receive as a loan.
Why use asset financing?
Being flexible, secured and short-term, asset finance is a beneficial funding strategy to help propel business growth. Being more flexible than traditional loans from banks, businesses may prefer financing against their assets as a way to access more working capital.
It is always recommended that you seek professional, personalised advice to determine whether asset finance is right for your business.
What are the advantages?
- Ease It’s often easier, quicker and simpler than going through a bank to receive a traditional business loan.
- Fixed With fixed payments over the term of your agreement, it can make cash flow and business budgeting easier. Note: Most, but not all asset finance agreements are offered with fixed interest rates.
- Limited exposure In the event that you default on your repayments, your limited exposure means nothing more than the loss of your assets. While still potentially devastating financially, it is significantly more limited than traditional loans.
What are disadvantages?
- Short-term If you require a long-term financing solution, asset finance may not be the most effective option.
- Asset value If your assets’ value is variable or not particularly high, your ability to borrow can be impacted.
- Asset loss As mentioned above, in the event that you default you canrisk losing your business’s assets which can disrupt or impact your business.
Personal Loan: what is it?
Personal loans are taken out by individuals for a variety of reasons, and by some business owners who are not able to access business loans or even asset finance.
A personal loan is a flexible form of funding that can be used for any purpose. Some common usages are:
- Personal projects
- Entrepreneurial endeavours
- Debt consolidation
- Home renovations
- Large purchases
- Holidays and trips
It’s important to note that not personal loans may not be approved for absolutely anything. Down payments, investments and university costs are some common examples of what personal loans could not be used for.
Understanding personal loans
If you’re considering financing your business through a personal loan, there are a few factors that you need to understand and subsequently take into account.
The comparison rate
Getting a comparison rate between one personal loan and another, or even against another form of finance is vital. It compares the two loans as a single figure, inclusive of fees and interest rates.
The interest rate
The interest rate determines how much you are required to pay back on the loan in addition to the principal amount.
The term of the loan
There are benefits to short and long term loans. Generally, the shorter the term of the loan the lower the interest rates. However, the longer the term the lower the repayments, though the interest over time will be more.
The fees
Application fees, service fees, default fees and other miscellaneous fees can vary from loan to loan. Make sure to read the terms and conditions before forming an agreement for any personal loan.
Option for extra repayments
If you’re likely to want to make extra repayments, make sure to check if the personal loan offers such an option without an additional fee.
The available uses
Personal loans can be used for many things, but not everything. It’s critical that you check whether the agreement under consideration stipulates specific or limited uses.
Secured vs unsecured loans
One of the important differentiations between asset finance and personal loans is that one is secured.
Asset finances provide collateral in the form of the balance sheet’s assets. Hence, it is considered a secure form of funding.
On the other hand, personal loans are unsecured because they do not require any collateral to receive financing.
Business loan or personal loan: which is better?
There are a number of key differences between business loans and personal loans.
Terms
The term for a business loan is more often than not longer than that of a personal loan.
Capital vs interest rate
Business loans provide more capital and at a lower interest rate compared to the lower amount of a personal loan with a higher interest rate.
Eligibility
Personal loans may be easier for individuals to be eligible for than a business loan.
Collateral
Unlike a business loan or asset finance, personal loans do not require collateral.
Usage
Business loans cannot be used for financing any other expenses than business, unlike a personal loan.
Application process
The process for obtaining a business loan is often longer and more complicated than applying for a personal loan.
Liability
A personal loan makes you liable as an individual if you are not able to make your repayments. This means that your credit score and finances will be impacted were you to default. Asset finance and business loans have more limited liability in terms of losses and personal liability.
Turn to ScotPac for tailored finance solutions
So, which is best for you: asset finance, business loan or a personal loan? Ultimately, your personal and business circumstances, requirements and situation will determine which working capital solution is optimal. Individuals, start up founders and sole traders will probably benefit more from obtaining personal loan finance while established businesses with a company history may find business finance a better approach.
For more information about how to best secure fast funding to fuel your business’s growth, turn to the team here at ScotPac. We’re more than happy to answer any and all of your questions related to business finance, and asset finance.