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Top 7 asset finance solutions for your business

When accessing finance for your business, a combination of high-level funding and low interest seems like a dream come true.

However, many factors dictate how much money a business can raise, including risk, financial history and funders’ criteria. As a result, many SMEs end up with a lower sum or worse terms than expected.

Fortunately, asset finance is a solution for those with plant and equipment, vehicles and other assets.

Model house and machinery with coins, to represent asset finance

As the name suggests, it refers to an umbrella of solutions that utilise your business assets as security to release capital. It is also commonly referred to as asset-based lending (ABL). It limits lender risk, meaning more businesses may access significant funding at lower interest rates.

Below, we list the seven most valuable asset finance solutions for businesses – including how each works and what you need to be eligible.

Why asset finance is beneficial

There are several benefits to asset finance. The most prominent is that it will improve most businesses’ access to funding.

By utilising assets as security, you will leverage higher sums of funding. This applies even if you are deemed a ‘risky’ venture, as the security will give the lender confidence that they can recoup the balance, if you are unable to keep up repayments. As a result, they are more open to risk and willing to accept a wider variety of business.

Many funding forms use assets. Putting yours forward as collateral will open new options and give you a better chance of finding a solution that addresses your needs.

You will have spent years acquiring your assets. Utilising them in your funding journey will ensure they work for you, giving you even more value.

Asset-based funding will also prove helpful in many business scenarios, including:

It is a valuable tool for companies across a range of funding needs and eligibility criteria – provided you have sufficient assets to utilise.

7 asset finance solutions for your business

There are many forms of asset finance with an option to suit almost every requirement. We’ve listed the seven most popular solutions for businesses.

Secured loan

Loans are standard solutions to various funding problems, with lenders providing capital in exchange for a fixed repayment schedule.

A secured loan requires assets for collateral, such as machinery, equipment, vehicles or other high-value items. It lowers the risk factor for the lender, who may repossess the assets to clear the balance if you default on payments.

There are many benefits to using a secured loan. Depending on the asset value, you will typically receive a higher funding amount than an unsecured loan. You will also be charged a more competitive interest rate, which will keep down the cost of your repayments.

Most loans require you to provide a personal guarantee, even with assets. This is where a guarantor, usually a director shareholder of the business, agrees to pay if your business fails to. It’s recommended to seek the protection of personal guarantee insurance if you are going down this route.

Commercial mortgage

A commercial mortgage is used to purchase or remortgage a property for your business. This might include office space, warehouses, factories, shops, restaurants, etc.

A commercial mortgage is also often used to develop or extend existing premises.

Mortgages typically come in two types:

In each scenario, the property you are purchasing acts as security.

Like a loan, the lender will provide the money needed to purchase the property, which you will repay as per the repayment schedule. The length of a mortgage typically tends to range between 15 to 25 years.

The level of deposit required is usually around 25-35%, which is higher than a residential mortgage. Repayments will be covered by your trading revenue, if owner-occupied, or rental payments, if a commercial investment.

Stock finance

Stock finance is ideal for businesses with unused stock, which is used as collateral for funding.

The lender will arrange a third-party valuation of your stock and determine the percentage of your inventory that can be financed. Once the finance facility is agreed upon, you will send the lender regular updates on your stock movements to amend the funding.

Stock finance is a great way to ease cash flow and provide working capital on an ongoing basis. It’s also suitable for seasonal retailers, who spend off-peak seasons with stock waiting in their warehouses. However, it is only applicable to product-based businesses.

It can also be a long process to secure funding, so don’t expect to use it for emergency cash injections. Some lenders will put a revolving credit facility in place of traditional stock finance as an alternative strategy.

Invoice finance

Late payments are one of the most common SME pressures, reportedly affecting 51% of small businesses. Invoice finance is a solution that helps unleash funding tied up in your unpaid invoices, but it only covers invoices issued to other businesses.

With invoice finance, a lender will fund you up to 90% of the total value of your unpaid invoices. The lending term typically lasts 90-120 days after the invoice date or month’s end.

Invoice finance comes in two types:

Alongside its ability to ease cash flow, the main advantage of invoice finance is that the only security you need is unpaid invoices. It offers accessibility, even to businesses that do not have significant assets.

However, you will need your customers to pay you so you can repay the invoice finance. Due to this, it is recommended to have stringent credit management processes too.

Trade finance

Companies frequently use trade finance – 80% of world trade relies on it.

If you export, it is used to fulfil orders sent to overseas customers, enabling productivity while you await payment.

If you import, you will use it to purchase overseas supplies for orders in the UK.

When you sell to your customer, you may use invoice finance to pay off the trade finance, as invoice finance is usually cheaper.

There are many benefits associated with trade finance. Firstly, it closes the gap at the start of your sales cycle, covering the expense of order fulfilment without requiring customer payment first. Secondly, it takes your business to a global market or expands your supply chains while mitigating financial risk.

Again, it’s a more accessible form of asset finance as the only need is a confirmed customer purchase order.

Leasing and hire purchase

Leasing and hire purchase fall under the asset finance umbrella, though they focus on acquiring assets for your business rather than using those you already have.

If you seek additional plant and machinery, vehicles or equipment for your operations, it is often a costly expenditure to buy it outright. Leasing and hire purchase enables you to secure the asset you need with regular repayments spread over 3-5 years.

With leasing, you will rent the asset for an agreed period. At the end of the loan term, you may continue the agreement at a low amount going forward or purchase the item for a nominal sum, and the asset never sits on your balance sheet.

Hire purchase enables you to own the equipment from day one.

It makes the purchase of assets affordable, as a deposit of 10-20% is only required. It’s also tax efficient.

You will end up paying more than if you had bought the asset outright once interest and other fees are factored in.

Sale and leaseback

If you already own equipment but are experiencing cash flow blockages in your business, selling your assets can give you the financial injection you need to get things moving again.

However, you often need to retain these assets to continue serving demand. This is where sale and leaseback offers value.

You sell your equipment, with little or no debt, to a lender for an agreed amount (typically the second value of the equipment – this will be determined by the lender’s valuer), and they then lease it back to you for regular repayments. This means you can boost cash flow while keeping the equipment you need to operate

If you are in a cash pinch, it is an effective way to inject finance into your business without hampering productivity.

Considerations

Although asset finance has substantial benefits and will suit many companies, you must consider if it’s right for yours.

Firstly, most options (particularly secured loans and leasing agreements) will have the condition that, if you fail to keep up with payments, your assets may be seized by the lender. If this were to happen, it would disrupt your productivity.

If you were to lose the assets, you would also be at a financial detriment, with equipment to replace (which would create additional problems if you are already struggling to repay debt).

It is, therefore, crucial to ensure you can afford the repayments to avoid further debt and the repossession of your assets.

How to access asset-based lending

Asset finance is diverse, covering many solutions that support businesses differently.

You reap many rewards by using your assets, including raising higher funding levels at lower interest rates. The lender also benefits from a decreased risk factor, making them more open to your application.

With more options now available, more businesses are eligible for asset finance – even those who do not have substantial assets to use as security. It’s possible to find a solution that suits almost every need.

If you are exploring asset finance solutions for your business, Pegasus will support you. From finding the ideal option for your needs to optimising your application, we’re here for you across the entire funding process.

Get in touch today to speak to an expert.

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