Asset financing is a funding solution for businesses that have an opportunity to grow but don’t have enough liquidity to capitalise. It can also help businesses that would prefer to spread major purchase costs over a more extended period.
Rather than tying up large amounts of capital and disrupting cash flow, a business can use asset financing to secure the use of the equipment, machinery, and other business assets.
Asset financing can also refer to the use of existing business assets as collateral to secure access to a line of credit. This type of funding facility enables businesses to unlock the capital tied up in their accounts receivables and other assets, so it can be put to use in other areas of the business.
Why Businesses Use Asset Financing
There are two main reasons why a business can benefit from an asset financing solution.
Securing the Use of an Asset
The purchase of a high-cost business asset can put considerable strain on working capital. Asset financing helps companies to secure access to the equipment, machinery, vehicles, and other assets they need without the sizeable cost of purchasing the asset upfront. You can maintain liquidity and invest the funds in other areas of your business that will help the company to grow faster.
Asset finance can also help businesses with capital tied up in assets to secure a line of credit. High-value assets can be used as collateral to secure funding. This can be an effective finance solution for businesses that struggle to qualify for a loan from a traditional lender, or that need to secure financing quickly to capitalise on an opportunity.
Asset Financing Example
Here’s an example of asset financing in action to illustrate how the process works and how your business could benefit.
A growing mid-sized construction company requires several new pieces of plant machinery to increase its workload capacity. There is a significant increase in demand, and the business will struggle to meet deadlines and take on new customers without expanding capacity.
The business doesn’t have enough liquidity to pay for the equipment upfront, so they enter into an agreement with an asset financing company to lease the plant machinery for the next 50 months.
With the use of the new machinery, the construction company can meet its current deadlines, take on more contracts, and increase revenue.
Once the contract has finished, the construction company can return the assets to the financing company or purchase the machinery for a nominal fee.
How Asset Financing Helps a Business to Grow
Asset financing provides business owners with a way to support growth and expand without stretching working capital and experiencing cash flow gaps. It’s a way to spread the cost of new assets and avoid tying up money that can be better used in other areas of the business. With access to new equipment and machinery, the company can become more productive and take on new customers.
According to the Australian Bureau of Statistics, lack of access to funding is one of the largest obstacles to general business activities and performance for small to medium-sized businesses.
For businesses looking to release capital tied up in assets they already own, asset financing can be a flexible and fast way to boost cash flow. By using assets as collateral to access a line of credit, you can negotiate early payment/bulk buying discounts with suppliers, and allocate your additional resources to the areas that will fuel the most growth.
The Benefits of Asset Financing
The key benefit of asset financing is the ability to secure access to equipment and machinery that help your business to grow. With these new assets, your business can generate more revenue than the cost of the monthly repayments and become more profitable. Asset financing is a highly flexible funding solution that offers several benefits, including:
No Upfront Costs
1. You can fund up to 100% of the purchase cost of an asset with no initial cost to the business. If you need to move quickly on an opportunity, asset financing can help you secure access to the equipment you need without impacting your working capital.
2. No Risk of Deprecation
When you purchase a high-value asset outright, the risk of depreciation falls onto your business. With asset financing, the risk of depreciation is usually the responsibility of the finance company. Making regular repayments can also be a more tax-efficient way to fund the purchase of an asset as the repayments are considered tax-deductible expenses.
3. Increased Cash Flow
With no upfront payment, asset financing allows you to spread the cost of an asset over a more extended period. This allows for better working capital management and the ability to invest in the areas of the business that will generate more revenue and growth.
4.Lower Maintenance Costs
Depending on the terms of the asset financing arrangement, the finance company may be responsible for the maintenance and repair of the asset. This means you can avoid any significant unexpected expenses, and the asset is kept in a condition where it can continue to work for your business.
5. No Need to Use Your Home as Security
Because the value of the asset is used as security for the funding facility, you typically don’t need to use your family home as security. Traditional lenders have strict lending criteria that usually requires some form of collateral. With asset financing, you can access the equipment you need without any additional collateral.
Who is Asset Financing For?
Asset financing is a flexible funding solution for businesses of all sizes. The funding facility can be accessed by registered companies, contractors, and sole traders.
Many businesses are using asset financing to take advantage of the extension of the instant asset write-off scheme. For more information on how the scheme works, read our guide here.
How Long Can an Asset Be Financed Over?
Asset financing facilities can range from 24 to 60 months. The length of the facility depends on the “usable” life of the asset, and how quickly you want to pay back the sum owed. Some businesses prefer a short-term credit arrangement, while others see a predictable long-term repayment plan as more beneficial.
Types of Asset Financing
Asset financing covers a range of funding solutions to help businesses access the equipment and funding they need.
- Hire Purchase
In a hire purchase arrangement, the finance company will purchase the asset for the business to use. The business will make payments to the finance company over a set period of months. Once the final monthly payment is made, the business will be given the option of purchasing the asset for a nominal fee.
- Equipment Finance
Equipment finance is a more flexible funding arrangement. The business will agree to make payments for the use of the equipment over a set period. Once the leasing period ends, the business will have the option of purchasing the equipment, extending the lease, or returning the asset to the finance company.
- Operating Lease
An operating lease is a short-term flexible funding facility that works in a similar way to an equipment lease. Because the length of the facility is shorter, the overall costs are lower, but the monthly payments are higher. This type of funding is more expensive in the long-term but can be an effective solution for a business in need of equipment of machinery for a time-limited period.
- Finance Lease
A finance lease differs from the other types of asset financing as it transfers the obligations of ownership onto the business rather than the financing company. For the duration of the facility, the business is responsible for the maintenance and repair of the equipment.
- Asset-Based Finance
While the above types of financing help businesses to access the assets they need, an asset refinancing facility helps you to release capital tied up in the assets you already own. By using your equipment, machinery, and property as collateral, you can access a line of credit to increase working capital and raise funds. You can also use your accounts receivables to turn your outstanding invoices into an immediate cash injection. This type of facility is called Invoice finance.
Asset Financing with ScotPac
Asset finance is an accessible working capital solution for businesses that need to fund the purchase of an asset or release the capital they have tied up in existing assets.
Finding the money for a significant purchase upfront can put pressure on working capital. Asset financing allows you to spread the cost of an asset over a more extended period, and make better use of your resources.
We offer a range of flexible asset finance solutions to help businesses access the funding and equipment they need to grow. If you need some help funding a business purchase or want to know more about unlocking the capital tied up in your existing assets, call us today to see how we can help.