As a small business owner, you’ve likely investigated the various ways you can effectively finance your assets during times when you’ve needed a big business purchase.
Whether it’s machinery, building space or even investment holdings, asset finance is a common tool that can enable a business to make that big purchase without putting a hole in its company credit card. But how does it work? And how can you do it effectively?
Asset finance uses the value of your company’s assets to secure working capital.
It borrows against your company’s valued assets, like homeowners borrowing against the equity of their property.
Asset finance is an excellent option if you have business assets and are looking to use them to grow and invest in other areas. However, incorrect asset financing can have several negative consequences such as increased cost, strained cash flow and even loss of your asset.
Understanding the different options in asset financing and how they can best help you is crucial in making an informed decision.
What types of asset finance can you consider?
Leasing
Leasing allows you to rent an asset for a fixed period, making it a convenient financing option for businesses that require equipment that is frequently updated or has a short lifespan. This can be an effective solution for businesses that need the latest technology or equipment to stay competitive, without incurring the cost of purchasing it outright.
Leasing offers more flexibility, as businesses can easily upgrade or switch to newer equipment at the end of the lease term. However, it’s important to carefully consider the terms of the lease agreement, including payment obligations and potential penalties for early termination.
Hire purchase
Another option is hire purchase. This is a financing arrangement that allows you to purchase an asset without purchasing it upfront. Instead, you just pay regular instalments over an agreed timeframe. The asset becomes yours to own once you’ve paid off the instalments, or you can choose to just return the asset to the lender.
Hire purchase is an excellent option for you if you need an asset on a long-term basis but don’t have the cash to make full payment. Cutting down the payment over time into manageable instalments makes budgeting easier, without having to front up a sizable chunk of finance.
Hire purchase agreements may also offer things like flexible terms and low-interest rates, so you have a great opportunity to not only gain a new asset, but structure it in a way that works best for you.
Asset refinancing
Asset refinancing allows you to use any capital tied up in an existing asset. This won’t be ideal if you’re a new business that doesn’t have any assets, but it’s a great choice if you have valuable assets like company vehicles, equipment, inventory, stocks or even intellectual property.
Refinancing helps you improve cash flow and invest in your business without having to sacrifice your assets by selling them outright. This might take the form of lease-or-buy-back arrangements, and since you’ve already established the value of your asset, you don’t need to go through any lengthy credit checks or approval processes when you’re applying for asset refinancing.
However, asset refinancing can also carry higher risk. Failure to meet loan repayments could cause the loss of the asset, you may have higher interest rates and it can also decrease your overall business equity and affect your future loan options.
Choosing the most effective asset financing for you
Deciding on the right asset financing option can be tough. It depends on several factors like the industry you’re in, your business size and company credit score. A good place to start is to look at the assets you have and the assets you need. Then consider your company’s goals and how each financing option might impact them.
Knowing what you have, what you need and what your goals are is the first step. It’s also important to assess your business’s cash flow and financial position. This includes evaluating any current debt and expenses, as well as your projected cash flow over the term of the asset finance agreement.
Choosing the right financial advisor
Work with an experienced financial advisor to help you determine which asset financing option is most effective for you.
Your financial advisor should be able to provide you with support for things like:
- Finding different financing options and lenders that can provide the most suitable arrangement
- Assisting in the credit assessment and application processes
- Ongoing guidance and advice for your business through the asset financing term.
When evaluating potential providers, consider factors such as interest rates, fees and repayment terms. It’s also important to look at the provider’s experience and reputation, as well as their level of customer service and support.
Asset finance can be a powerful tool
Finding a financial services provider to advise you on the best way to finance your assets can help your business grow and protect your wealth.
Effectively financing your assets will better support your operations, while also minimising risks and optimising your financial performance.
Feeling overwhelmed? Don’t be. Whether you’re a small business owner looking to gain new equipment or seeking to invest in long-term assets, our team of finance professionals can provide a valuable solution to support your growth and financial stability, no matter what stage you’re at.
Find a financial planner who is as committed to helping you achieve your financial goals as you are. Contact us to make an appointment.