How Does Asset Finance Work, A To Z Guide For Beginners
There are plenty of misconceptions floating around asset financing in business circles. For starters, many believe that asset financing means that a business is not doing well and requires funds to sustain its existing operations.
This means that many SMEs and MSMEs think of asset financing as some kind of a taboo, which signals problems. That is not the case. Asset Financing can be an incredibly useful avenue for a business looking at expansion plans or growth.
In this guide for beginners, we are going to discuss some of the following areas around asset financing-
- Meaning and definition of Asset Financing
- Probable benefits of Asset Financing for business organizations
- Different types of Asset Financing Options for businesses
- The Final Takeaway
If you are a business that is looking to approach asset financing, this article will help you clear most of your doubts and queries. We speak to leading asset finance lenders and request them to help us create this informative guide on asset finance
Meaning and Definition of Asset Financing
There is a bad tendency in industry and business circles to use complicated jargon for even the simplest things. In asset financing, a business borrows a loan from a financial lender by showing either of the following-
- Positive balance sheets and month-on-month cash flow and revenues.
- The various investments that the company has been making
- Value of the total infrastructure that the company holds in ownership
- Inventory lying in its warehouse or distribution centers
- Other movable and immovable assets that the business might have
Let us break it down for you- asset financing means taking a business loan!
The only thing that you need to know is that in an asset financing process, the business that is borrowing the money has to offer some form of security. The key difference between a traditional business loan and asset financing is immediacy.
In other words, in asset financing, as the security is provided, it becomes easier for the lender to disburse the loan amount sooner. In a traditional process, this would take a lot of time.
Benefits of Asset Financing for Businesses: An Analysis
In this section, we are going to list down some of the major benefits of asset financing for businesses-
- Faster Process– We have already mentioned that as compared to traditional lending practices, asset financing allows businesses with instant cash injection into their operations. This can help with quick and instant decision-making for the business.
- Regular Payment Options– Businesses are always worried about cash flow. Asset financing requires businesses to not disrupt their cash flow. You do not have to take money out of your capital accounts to buy expensive infrastructure.
- Fixed Interest Rates– Leading financial lenders that offer asset financing options do so at a fixed interest rate. This means that businesses can pre-empt this consideration and make it part of their monthly expenditure budgets. This is easy and convenient.
- Penalties are Lesser– If a business is for some reason or another unable to pay back the amount, it only results in marginal losses. You will just end up losing the asset that you would have provided as security. This means that it is a far safer option.
- Power Growth Plans– Businesses need to think on their feet. This means that sometimes funds can be required for instant decision making. Maybe buying out a new competitor or expanding to a new geographical region to catch new markets.
Other financial experts point out that asset financing has a ton of administrative gains as well. This is particularly the case if you are looking at assets on a contractual basis. A good example of the same can be company vehicles. This helps in reducing operational costs and ensures better vehicle management.
Different types of Asset Financing Options for businesses
Businesses need to understand asset financing that can help bring flexibility and benefit to their operations. The aim is to reduce the burden on your company’s capital with a huge expenditure that can offset operational costs.
In this regard, there are different types of asset financing options that businesses can go for-
- Hire Purchase-
In this arrangement, the financial lender buys the equipment or infrastructure for your business. As a business, you pay the lender fixed sums monthly for a stipulated period of time. Once the term ends, your business enjoys complete ownership of the equipment. The only downside is that the business might end up paying a higher price as the lender will command a premium.
- Equipment Leasing-
This form of asset financing is very close to renting equipment. You get to enjoy the equipment after you pay monthly lease or rent payments. Once the lease period is over, a business has an option to increase the period, upgrade to newer equipment, or purchase the equipment by paying the remainder to the lender. The service costs are borne by the lender.
- Financial Leases-
Businesses need to think of this as some kind of a cross between hire and equipment leasing. While you are paying monthly rent to the lender, you are doing so for longer periods, rather than simply a couple of years. The ownership of the asset is not yours, and hence you can claim VAT benefits on the same. However, you end up paying the full value in terms of the amount.
- Asset Refinancing-
Many businesses might need a direct cash infusion for one or the other reasons. This means that businesses might need to start using their existing assets and liquidate them for some other purpose. As a thumb rule, under this process, a financial lender is able to stretch the amount to nearly 80% of the total valuation of the equipment or asset. They can go higher as well.
The Final Takeaway
In the last few years, asset financing is slowly emerging from its negative connotation into a workable business strategy that can bring positive results. To be honest, SME and MSME owners are still unable to come to terms with the basics of what asset financing is all about.
If you have any major doubts or require any clarifications on asset financing, please let us know in the comments below. We would be more than happy to help your business in this regard.