In the modern lending market, there are an almost infinite amount of solutions available to businesses who are seeking funding. Asset-based finance is one of those.
The term asset-based finance may apply to a range of funding types, such as bank and alternative loans, hire purchase and leasing. Each of these provides their own set of benefits, depending on the financial requirements of your company.
Generally speaking, asset-based finance is a useful way to access substantial funds to invest in your enterprise. However, as with every source of funding, it will not be suitable for everyone, and it is essential to be aware of the implications before committing.
In this guide, we detail how asset-based finance may work for your business.
What is asset finance?
There are two forms of asset-based finance. The first is finance that enables you to purchase assets you need for your operations, such as through leasing and hire purchase. The second is when your assets are used as security against a loan, enabling you to raise funds.
With the first form, a lender will pay the upfront cost of the asset you need, which will then be given to you to implement into your workplace. In exchange, you will need to make regular repayment instalments to pay off the debt. In the case of hire purchase, you will own the asset after the balance has been cleared. If you are leasing the equipment, you will not obtain full ownership – though payments will likely be lowered as a result, however you generally have the option to purchase at the end of the period.
When using assets for a loan, any assets you already own may be offered as collateral to the lender. If you fail to keep up with loan repayments, the assets can then be repossessed to enable the lender to receive their funds back. Many loans, particularly from banks and commercial lenders, will require assets to be used as security to minimise the risk posed.
An extra, third option of asset-based finance is asset-based lending that uses assets on your balance sheet as security against lending. An example of this is sale and leaseback, where your assets are sold to a lender who then leases it back to you. So, you receive a lump sum from the sale and spread the cost out with a payment plan, allowing you to retain access to the equipment you need. It may also apply to stock finance, where your stock is used as collateral for a loan while it sits in your warehouse, invoice discounting, a commercial mortgage or even a commercial loan.
Although the solutions outlined above all fall under the umbrella of ‘asset finance’, they are significant differences and advantages associated with each. This means they may be used for varying reasons, which we will explain in more detail later.
What is defined as an asset?
When using assets as security, there are restrictions on what is acceptable. In most cases, it will able to goods that carry a substantial value. Examples include:
- Machinery and other equipment
- Company vehicles
- Hardware, such as computers or other devices
- Premises
- Office furniture and fixtures
- Intellectual property
In some cases, it may relate to specific assets, such as with stock or invoices.
Regardless of what type of asset it is, it will need to be owned outright by the business (as opposed to being hired). This means that the lender will be able to take control of it from you if you fail to keep up with your payment plan.
If you are utilising leasing or hire purchase, almost anything could be viewed as an asset so long as your business wants to pay for it. Ordinarily, it will cover costly assets which you may not want to pay for entirely upfront. This could include vehicles, equipment, software, hardware, security devices and so on.
When should asset finance be used?
Asset-based loans
If you are borrowing against your existing assets as a means of obtaining a loan, there are many scenarios where this could come in handy. A business loan suits many purposes, such as funding growth and expansion, enabling a merger or acquisition, filling a cash deficit or fuelling a start-up.
The benefit of utilising an asset-based loan over an unsecured loan is that you will be able to access higher sums by reassuring risk-averse lenders they will get their money back in one form or another. The added security also brings lower interest rates.
However, it is essential that you can confidently meet your loan repayments, as you may otherwise face your assets being removed. This will disrupt your productivity and may lead to worsening debt.
Leasing and hiring
The main advantage of leasing or hire purchase of assets is that, rather than having to pay the full cost of equipment upfront, you can spread the expense out over several months. However, you will ultimately end up spending more than the original price of the good(s) due to interest rates and associated costs.
For hire purchase, it’s a great way to obtain ownership of sizeable assets even if you do not necessarily have the funds to cover them.
Leasing is also particularly useful if you only require the asset for a short time, such as if you are working on a specific, short-term project. Once the lease period comes to an end, you won’t have ownership – meaning you can give back the equipment or even take out a new lease on an updated model if technology has progressed in the duration of your lease. There is also generally the option to purchase the asset at the end of the lease period.
Leasing and hire purchase may assist your business growth efforts, particularly if you are introducing a large number of new assets at one time. Such investment is made more affordable and limits the pressure on your working capital.
Sale and leaseback
Sale and leaseback of equipment is an excellent solution if you have appropriate assets and need assistance in boosting cashflow.
When selling your assets, you will receive funds in exchange – which could be sizeable depending on the value of the goods you sell. This money can then be reinvested elsewhere in your business or provide the business with additional working capital. By leasing the equipment back, you spread the cost into more manageable instalments, while retaining access to your assets.
This is an ideal solution for those who need to free up working capital but equally need their assets for daily processes. So, you can receive the funding you need without harming your productivity.
Get advice
Asset finance covers a range of funding types that either allows you to get the plant and equipment you need to operate your company or use those goods you already have to secure loans to invest elsewhere. As such, it offers support for a wide variety of financial needs and will be suitable for many enterprises – provided they have valuable assets in place to utilise.
If you do not have substantial assets, it may be harder to access such finance – but, there will be other solutions available to address your unique challenges.
If you need assistance in identifying the right funding route for you – whether it be asset-based or otherwise – we are here to help. Our team of advisors have experience with many finance types and how they benefit businesses, meaning we can determine the best options for your requirements.
We also maintain a network of contacts, comprising of lenders and other sources of financial support, who we will connect with you to move you forward in your funding search.