Asset Finance Explained With 5 Examples You Should Know

9 Examples of Asset Finance You Should Know

With the gradual decline in the availability of white-collar jobs, the alternative is self employment through entrepreneurship. As an individual or group that intends to start something, you must be fully equipped with ideas and funds.

Unfortunately, most times individuals could have the project idea; but funds becomes a problem.

Also, a company which has already been established could require funds to deliver a particular work that seems to be financially more demanding.

Whether it’s purchased office equipment like tables and chairs or some heavy items like machinery or vehicles, these are the tools that will help your company succeed, grow, and thrive.

So, what exactly is asset finance?

In short, asset finance is essentially a loan that can help your business raise funds to buy or replace assets in a cost-effective manner.

It’s explicitly used to purchase or lease the products you’ll need to run your business. You’ll probably need it if you want to grow your business.

So, this article aims to let you know all that there is to know about asset finance.

But first, what are assets?

Assets

Assets are items owned by your business that will not be sold as products or services. Depending on the type of business you have, an asset could be tangible or intangible.

It could be your office chairs, computers, and any other equipment. This could be your printing equipment if you own a small publishing company. 

If you own a catering business, your assets could be refrigerators and ovens. And if you make money a farming business, vehicles such as crushers and tractors could be your valuable assets.

Financing a project may be backed up by a collateral. In such an arrangement, if the borrower is unable to pay the loan at the end of the required period, the assets could be taken.

Lending Against Existing Assets VS Lending Against Future Assets

Asset-based finance encompasses both the refinancing of existing assets and the hiring or leasing of new assets.

Refinancing existing assets refers to what you do with equipment that you have already purchased. You can do this to free up the capital locked up by selling assets to a lender who would then lease them back to you.

The other kind of asset-backed financing allows you to buy or lease new assets. Both types of asset financing enable users to access business assets.

Asset Finance Is Intended For Whom?

Asset Finance Explained With 5 Examples You Should Know

Asset financing is intended for all types of businesses, including small and medium-sized enterprises (SMEs).

It is intended for those who want to gain access to a high-value item to help their business grow while spreading the cost of the item over its useful life.

Asset financing is also available to limited companies and partnerships, sole proprietors, and public limited companies.

There are many types of asset finance. Understanding which one to use can save your company time and money, offer additional tax benefits, and reduce the likelihood of working with obsolete equipment.

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Duration of funds

There are various ways one could get these funds. A typical case is government grant. Grants are usually characterized by a high level of competition, and a certain criteria must be met before a grant is being offered.

Seeking funds from well-to-do individuals is also a point for consideration. This category of persons have already made it in their various businesses, as such, they look for newbies in the industry to mentor and sponsor.

This category of investors are very particular on the quality and viability of your ideas, and they may also want to have a share in your business.

The source of business funds that is particular to this article is bank loans and asset financing. As such, this article  will explicitly explain what asset financing entails, and most importantly their examples and applications.

Depending on the quality and usable years of the asset, asset financing is usually given between 1 to 7 years or more as the case may be.

However, the borrower must show his capacity to pay at the end of the given duration.

Types of asset finance

1. Hire Purchase

Hire purchase is a popular type of asset-based lending. With hire purchase, you can purchase an asset and pay for it in instalments, allowing you to get the asset right away while spreading the cost over time.

After you’ve made all of the payments, you’ll have full ownership of the item. Hire purchase agreements typically last for one to six years.

You would be required to pay a deposit before fixed monthly instalments for this type of asset lending. You will also be accountable for the asset’s maintenance and insurance costs.

This method of purchase gives the buyer the opportunity to pay for the purchased item. The buyer could pay an initial deposit of 40 to 50 per cent of the actual price, while the balance is to be paid within a certain period.

In a situation where the buyer fails to pay after the given duration, the seller may repossess the good.

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2. Equipment financing or leasing 

Asset Finance Explained With 5 Examples You Should Know
Asset Finance Explained With 5 Examples You Should Know

This involves renting an asset for a certain duration.

This is beneficial to businesses as it enables them to control their budgets, have access to the equipment necessary for business growth, and there’s no restriction to what one can lease.

If you don’t want to buy the asset, you have an option to lease it from a lender. Then, you can pay monthly instalments for the time you use it.

You do not emerge to own the item in this structure, but the beneficial effects include having the thing right away. Only a fraction of the total amount is required upfront.

One of the advantages of leasing equipment is the flexibility with the arrangement. This is helpful if your business changes or the assets you require or desire change.

3. Asset refinancing

If you invest in equipment and want to free up a few of the capital that’s been tied up, this type of asset lending may be appropriate for you.

A lender purchases your equipment and leases it back to you over a set period. You will make periodic payments over that time.

This is a way one could get funds from equipment a business already owns. It could also be said to be the process of securing a loan on the basis of valuables owned by the company.

4. Finance or capital leases

A finance lease, also widely recognized as a capital lease, is a form of business asset financing.

It falls somewhere between purchasing and leasing equipment. It is an extended lease that covers the majority of the asset’s life.

You have complete access to it and pay the total value for it over time. However, you do not own it.

If you chose to pay smaller instalments over a prolonged period, you should think about it.

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5. Operating lease

Asset Finance Explained With 5 Examples You Should Know

Operating leases are closely related to finance leases in that the company that leases you the item is accountable for the cost of maintenance.

In this type of lease, the customer rents a piece of equipment only for a fraction of its useful life.

Operating leases are beneficial since maintenance costs and taxes are not directly borne.

It is the form of lending that creates access to business machineries without necessarily purchasing them up front.

Utilizing asset finance is good for both new and existing companies.

6. Account receivable

This refers to credit sales of a business that is yet to be collected from its customers.

In some transactions, a discount may be given to a customer for timely paying the amount due to the company.

With asset financing, a company can meet its technological needs. A company may not have the required funds to procure the latest technological equipment.

With asset financing, you could split the cost of the equipment over an agreed period.

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7. Marketable securities

These are short-term financial instruments, which are unrestricted, and are issued for debt securities of a publicly registered company.

Apart from the issuing company creating these instruments, the government could also issue debt securities in the form of T-bills, particularly for funding public expenditures.

8. Property, plant, and equipment

This is a reasonable capital asset on the financial statement of a business, which is for profit and revenue generation.

It is very important in the financial projection of a company’s operations and expenditures.

The value of PP&E between companies varies, depending on the nature of the business.

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9. Invoice finance

This type of asset finance bases your borrowing capacity on what your customers owe to your business.

Asset financing is not only applicable to equipment. It could also be useful when the ideas for creation or expansion are available but the funds are unfortunately not available.

Asset financing is open to public limited companies and sole traders, as well as eligible limited companies and partnerships, etc.

Why asset financing?

The major advantage of applying asset financing methodology is the fact that it saves you from feeling the effect of currency depreciation.

For instance, Mr A intends to expand his business but has no funds. In a situation where he decides to save money rather than seek asset financing, the depreciation might be massive.

This is because the value of $20,000 today will not be the same as in 2030 as the case may be.

Another reason for the acceptability of asset financing is that it could go a long way in assisting those unable to access traditional forms of business finance.

Asset financing enables you to have some leftover capital for business growth purposes.

This is because you will distribute the asset cost over some time, hence the financial burden reduces.

Bottom Line

Asset finance loans fall under secured loans. This makes it safer for both infant and existing businesses, that intend to improve their productivity.

Asset financing enables you to maximize the value of assets you already own, as well as purchase or lease new assets for your business.

It is critical to determine which type of corporate asset finance or asset finance loan is best for your company.

Once you’ve determined the timeline for repayment, make sure you’re only spending for assets that you still require. Your tax advisor or accountant at your company can also assist you in making the best decision.

However, an individual or company should not make borrowing a habit because they have assets (reasonable collaterals).

They should rather strategize properly first to effectively utilize funds.

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Post Author: Abimbola Joseph

Abimbola Joseph is a creative content developer who derives pleasure in encouraging individuals to be the best they can be in all relevant facets of life. She believes that we all have a better version of ourselves which can be leveraged to impact others and make the world a better place. Connect with me on Instagram @abimbolajoe.

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