If you don’t have enough working capital to buy machinery and equipment outright, Asset Finance can be an effective funding solution. More and more Australian businesses are using Asset Finance to fuel their growth plans. According to the Commercial & Asset Finance Brokers Association of Australia, over $40 billion of new business equipment is financed each year.
Here’s what you need to know and what to look for if you’re considering using Asset Finance to fund the purchase of a new or second-hand business asset.
What Is Asset Finance?
Asset Finance is a form of business finance that is used to fund the purchase of vehicles, machinery, and other business assets. The value of the asset is typically used as security for the finance facility.
It allows businesses of all sizes to access the most efficient and advanced equipment they need to compete. Rather than paying for an asset upfront, you can spread the cost over a more extended period. Asset Finance terms typically run from 24 to 60 months.
The overall cost will be greater than if you purchased the asset outright. But Asset Finance can be a practical solution for businesses that don’t have enough capital to make a large one-off purchase or would prefer to spread the cost and use their available funds in other areas of the business.
You can also use Asset Finance to release capital from assets that you already own. This can be an effective funding solution for asset-rich businesses that suffer from cash flow gaps.
How Does Asset Finance Compare to Other Business Funding Options?
Asset Finance is a funding solution that helps business owners overcome a specific challenge. Raising capital to fund the purchase of a new asset can be extremely difficult.
While a credit card or overdraft can be beneficial for short-term cash flow needs, they can be costly if used to fund a large purchase over a long period.
Business loans can be used to purchase equipment and machinery. However, the strict lending criteria and extended application process mean this type of financing is often unsuitable or unavailable for many business owners. A traditional business loan will also reduce the likelihood of being able to borrow money at a later date.
With Asset Finance, the value of the asset is used as security for the funding facility. This reduces the finance company’s risk, which means businesses that don’t qualify for a traditional loan will usually be accepted for asset financing.
For most Asset Finance facilities, the funding is viewed as a contractual agreement and not as a loan. This can provide additional tax benefits and usually doesn’t impact your ability to seek funding later.
For a more detailed look at asset financing, read out post How Asset Finance Works: A Basic Guide to Getting the Most From Your Business Assets.
Advantages and Disadvantages of Asset Financing
There are several advantages to using Asset Finance to fund large expenses, but there are also drawbacks that you should be aware of before entering into an agreement.
Low Upfront Cost
Asset Finance enables you to access the tools and equipment you need without having to make a large upfront payment. Rather than using your available capital to buy the asset outright, the finance company will buy the asset for your business. You can use the equipment immediately and spread the cost over smaller regular repayments.
Many business assets suffer from a sharp depreciation over a short period. For example, a new car can lose 40% of its value within a year of purchase. Asset Finance helps to reduce the risk of depreciation. For many funding facilities, the finance company is the asset owner until the final repayment is made and must replace the asset if it fails to survive for the term duration.
Increase Working Capital
Instead of tying up capital in an expensive business purchase, Asset Finance helps you maintain liquidity so you can invest in areas that will be more beneficial for the business. You can use the increased liquidity to support growth plans, negotiate discounts with suppliers, or take advantage of opportunities that require fast investment.
In many Asset Finance agreements, the finance company is responsible for maintaining and managing the asset. You don’t need to worry about unexpected costs to keep the asset operational. It may also be the finance provider’s responsibility if the asset needs replacing before the end of the contract.
Keep Lines of Credit Open
By using Asset Finance to fund new equipment, you keep traditional lines of credit like bank loans open to be used at a later date. An Asset Finance facility can also sit alongside your existing funding arrangements.
No Security Required
In a typical Asset Finance agreement, the value of the asset you want to purchase is used as security for the funding facility. You don’t need to use your home or personal property as collateral.
As with any form of business funding, Asset Finance has limitations that makes it more suitable for some businesses than others.
Ownership Of the Asset
You do not fully own the asset until the end of the contract term. With a commercial loan, you can borrow money to buy equipment and machinery outright. With Asset Finance, the finance provider will either own or hold a security interest in the asset for the length of the contract.
Not Suitable for Short-Term Funding
Asset financing terms generally cover a period of 24 to 60 months. If your business needs short-term funding to cover the cost of a one-off purchase, an Invoice Finance solution may be a more flexible alternative funding solution.
Limited Cover for Accidental Damage
Depending on the funding arrangement, maintenance and management costs are usually covered by the finance company. However, your business may be liable for any accidental or preventable damage to the asset.
Factors to Consider When Comparing Asset Finance
It’s important to compare your options so you can make an informed decision and choose an Asset Finance solution that is right for your business. Here are the factors you should consider.
Make sure you are aware of all the potential fees involved before entering an agreement with a financing company. You may be required to pay an initial application fee and ongoing monthly fees for the funding facility. If you plan to make additional payments, you should also be aware of any early repayment fees.
Type of Asset Finance
There is a range of different types of Asset Finance. If you plan to take full ownership of the asset at the end of the contract duration, you will likely require a chattel mortgage or hire purchase facility.
Some finance providers offer a choice between a monthly or weekly repayment schedule. The costs can vary between these facilities, but you should seek a repayment schedule that fits your cash flow needs.
Generally, the longer the contract, the lower the cost of your regular repayments will be. But this also means that you will pay more in interest over the length of the contract. It’s always advisable to pay off business debt as soon as possible, but this shouldn’t stunt your business’s growth by limiting your access to working capital.
When you’re comparing Asset Finance solutions, you should consider the overall cost of the funding facility. The cost of monthly repayments can vary according to the lender, but the overall cost will help you determine how much your business will ultimately pay for the asset.
Asset Financing With ScotPac
There are lots of factors to consider when you’re choosing an Asset Finance provider. A funding facility can last for several years, so it’s essential to consider your current situation and your business’s future needs. Take time to compare your options and select a solution that meets the unique needs of your business.
If you need help understanding your options and finding an Asset Finance solution that works for your business, contact our friendly team of business finance experts today or use our simple online enquiry form.