What is Asset Finance and how will it help to grow your Business?

The financial market of New Zealand has many products to choose from. Each of these products has unique features to fit the varied needs of the borrowers. Business asset finance is a popular loan type among business owners.

Companies need new equipment time and again to grow & sustain in the rapidly evolving market. Asset financing can be the ideal solution in this case. It is better to gain adequate knowledge before you decide to take out any loan type. Continue reading for some additional information.

What is Asset Finance?

Asset financing is short-term business finance that uses a company’s assets (Machinery, Equipment, invoices, real estate assets) to borrow money or obtain credit. Asset Finance gives businesses access to assets and equipment without depleting the funds needed to pay employees and track cash flow.

You can use Asset finance to purchase or lease a vehicle, machine, or office equipment. Asset Financing Loans include construction equipment, imported machinery, office furniture, and coffee machines. No matter how unique or unusual, if the asset you have in mind is central to your business, you can apply for asset financing.

What are the types of asset financing?

There is a wide range of options in leasing and installment purchases, with some options better suited to the asset you are looking for than others.

1. Contract hire

It is also known as vehicle inventory financing, as it can finance company vehicles only. The business lender purchases the car needed for the business, and the borrower repays it in installments over the agreed lease term. Service costs and maintenance are the borrower’s responsibility, as is the disposal of the vehicle at the end of the lease.

2. Operating Lease

This is a term lease that does not pay the total cost of an asset, often a special-purpose machine, because it is leased for a period of less than its useful economic life.

Often cheaper than equipment leasing because the company only pays an estimated value for the item over the agreed limited lease period. The leasing company will be responsible for maintenance and recover the asset at the contract end.

3. Installment Purchase

It allows you to purchase an asset over an agreed-upon period by dividing the cost. The item appears on your balance sheet, and insurance and maintenance are your responsibility. At the end of the term, the asset will be yours.

4. Equipment Leasing

In this type of asset financing, the business lender purchases the asset your company needs and rents it to you. Providers bear the cost of maintenance and repairs. You only must pay a fraction of the total value upfront. It is ideal if you want a high-quality, expensive manufacturing machine but need more funds to buy it outright.

Generally, you must pay the first month’s rent in advance while the rest is spread over the rental period. At the term end, you can continue leasing, purchasing, or simply returning the device. It is especially popular with companies that need help to make medium-term financial forecasts because they need to respond to rapid change.

5. Finance Leasing

Also known as capital leases, long-term leases are designed for the useful life of an asset. Get the most out of your facility, pay it back over time, and be responsible for maintenance and insurance.

Payments generally continue until the lender recovers at least 90% of the cost of the property value. Lenders can provide a percentage of the value after the item is sold, but your company does not have the option to purchase the asset directly.

6. Asset refinancing

This option is different as you secure a loan against an asset your business already owns (such as a vehicle, equipment, or commercial building) to free up the cash your business needs. When you refinance an asset, the lender makes an offer based on the equity you hold in the asset. Unlike short-term business finance, it means you can free up cash from your partially-owned physical assets.

The refinanced asset must be physically removable to be considered collateral for the loan. The amount you can borrow is dependent on the asset value that releases the cash. If refinancing is agreed upon, the lender will pay the provider in installments over the agreed term, including interest on the loan.

How can Business Asset Finance help my business grow?

Let us now check out how a business asset loan can assist you in growing your business.

1. Flexibility

With various financing options available, asset financing offers business owners a flexible solution to purchase equipment critical to their growth.

2. Fast and easy process

The process of buying assets with Asset Finance is surprisingly easy. Just identify the assets you wish to purchase and the supplier you want to purchase from and provide supporting documentation such as past business accounts (this varies by the funder). Then approach a panel of lenders to find the best deal for yourself. The process is surprisingly quick, with funds disbursed within days.

3. Cash flow

Purchasing and prepaying for expensive equipment is impractical and can hurt a company’s cash flow. By funding equipment through asset business lenders, businesses can spread costs over a while and free up cash flow for other uses that support business growth.

4. Tax Benefits

Payments for certain asset financing agreements are tax-deductible business expenses and are available for investments. If you purchase equipment, machinery, or vehicles (known as plant and machinery), you can deduct some or all of the item’s value from your profit before paying the taxes.

You can claim a capital deduction if your equipment is a:

Direct purchase
Purchase by installment purchase
Offer under a long-term finance lease

End Takeaway

Any business, regardless of size, can benefit from business asset finance, small companies looking for growth and access to the facilities they need to do so. Asset financing is available to limited liability companies, public companies, and sole proprietorships to help spread the cost of the assets a business needs.

How Does A Small Business Loan Operate?

Small businesses often miss out on market opportunities because of a cash flow issues. But this should not stop you from looking for growth. Business owners can look for financial institutes such as banks or non-banking lenders for access to money.

You can use 2nd mortgages to hire new employees, renovate, inventory, stock, launch a new product, or expand your business. Businesses are in constant need of funds. So, as long as you use the borrowed money for your business growth or any worthwhile business purposes lenders are happy to assist. Most businesses at some time will borrow funds to fix the gaps in their cash flow.

How Does A Small Business Loan Operate?

Loans are given to business owners who need quick access to funds to meet their immediate business expenses. There are different types of business loans, one to meet everyone’s requirements. If you are new to the industry and have a poor credit score, you can seek a small business loan with bad credit.

The financial market has many banking and non-banking lenders for you to choose from. Visit their official website and check their eligibility criteria. Make a list of all the financial institutes whose criteria are easy for you to meet. Thus, prepare a list of documents required by a lender. Compare and consider the terms such as interest rate, repayment term, and application charges. Apply to the most suitable financial institution. If you fulfil the eligibility criteria and provide all the documents, you will get the funds in your bank account. The approval time will depend on the type of loan you select to go with.

There are several types of business loans available in the market. You will have to choose one according to your purpose and the financial conditions of the business. To access a loan, you will have to meet the eligibility criteria. It remains mostly the same, with a few variations according to the lender and chosen loan type. The requirements that are common across all financial products are as follows.

Credit Score

A credit score is a number that indicates the financial health of a business. The credit report is a must-check by all lenders, however some are not concerned by any payment defaults.

Operational Time of Business

Lenders want to invest in businesses that have been operational for at least six months. They see new businesses as a risk, but again there are lenders who can assist if you have a start up business.

Records of The Business Finances

These include balance sheets, cash flow statements, a business plan, and profit & loss statements.

Business And Personal Credit Score

If your business includes credit history, creditors will check your credit management capability. If there is no credit history of your company, the financial lenders will review the personal credit history of the business owner. This is because they will require a personal guarantee for repaying the funding even if the company defaults.

What Are The Various Different Types of Small Business Loans?

The different small business loan types available in the market are:

Business Asset Finance

It is also popularly known as equipment financing. You can finance a business asset or equipment using borrowed money. Here, the financed asset is the collateral. The borrower has to repay in the form of monthly instalments. These are a good option for new business owners who need equipment to run their business. Also, the interest rate and other loan terms are favourable as the lender is at a reduced risk.

Secured Business Loan

A secured business loan requires an asset to submit as security. It is a good option as a small business loan with bad credit. Borrowers can use property or vehicles as collateral. The applicant has to repay within a fixed instalment term. The loan amount is usually approved based on the value of the collateral. Business owners get attracted by this form of loan due to lower interest rates, which is indeed a plus point. It is a perfect choice when you need funds for a large purchase or business opportunity.

Unsecured Business Loan

Unsecured business loans do not require collateral and are a popular choice amongst business owners. There is no need to offer any asset as security against the loan. Factors that lenders look for quick approval include a healthy cash flow, a solid financial history, and a good credit score. These are short-term loans, the terms varying from 3 months to 3 years. Based on the annual turnover of your business, you can get a sum ranging from 5000 to 500K AUD.

Invoice Financing

It is a secured loan where you can submit the accounts receivable as collateral. You can use invoice financing as business asset finance, buying inventory, or paying your staff. The loan amount is approved mainly based on the cash flow of your business. Once you receive the pending invoices, repay the debt. The loan amount will be lesser than the value of the invoices. New business owners can also apply if they have sufficient invoices to use.

Business Line of Credit

It is a form of financing where you use the funds instead of getting a sum of money altogether. It is a strategic tool that gives businesses access to money to meet short-term requirements. The enormous advantage of this small business loan with bad credit is that interest is charged only on the sum used, not the entire lump sum amount.

Final Thoughts

The first step to seeking a business loan is doing your research and finding an appropriate lender. If you get stuck anywhere, take help from financial advisors. We recommend not applying with several lenders simultaneously, as multiple rejections can negatively affect your credit report. All business loan types, such as secured, unsecured, and business asset finance, have similar working with slight variations.

Why Are Business Owners Attracted To Asset Finance?

Asset finance is a great way for businesses to use current assets such as a real estate property or machinery and equipment of a business to secure funding. Alternatively, asset finance can be used to purchase new machinery or equipment. Any equity in these assets can be used to secure a short-term business loan. The purpose of the loan does not need to be for the purchase of equipment but can be for any business purpose such as cash flow or business expansion.

One-third of the business owners have utilized business asset finances to provide funding to their businesses. According to a survey, 29% of companies used asset funding, among which 20% have bought new plant or equipment with it. A large number of businesses used it to obtain working capital as it is a quick and easy option of funding.

What Is Asset Funding?

Examples of Asset include

Hire Purchase
Finance Lease
Equipment Lease
Short term business funding
Asset Refinance

What makes hire purchase and finance leasing different is that hire purchase allows you to have the asset at the end of the settlement. But a finance lease lets you borrow the property for a certain period.

Example of Asset Finance

To know what asset finance is practically, here is an example.

Suppose you own a manufacturing company. You might need new pieces of machinery to increase production to fulfill market demand. You require the machines immediately for your company, but you do not have enough money to buy the assets.

After examining thoroughly, you choose to hire. The advantage of this purpose is that it does not ask for a deposit, the financing can provide the full purchase price.

How Does Asset Funding Work?

Asset finance, can also be known as bridging finance, they operate quite differently than other finances. Bridging finance requires equity in real estate asset to secure the funding.

Bridging finance can allow you to borrow up to 75% of the value of the property including your current mortgage.

Increasing Popularity

Recently, as business owners have realized the advantages of asset financing, it is becoming popular with time. Their popularity is because they are a quick and easy option to secure funding for your business.

Advantages of Hire Purchase

There are several benefits of hire purchase-including

Saves cash flow without using it to buy new assets in an emergency.
Your business can procure up to date machinery assets.
The interest rate is remarkably lower than the interest rates of bank loans or overdrafts.
Set monthly repayments to assist with managing cash flow

Advantages of Finance Lease

Finance leases provide many advantages to businesses such as

No need to use cash flow to purchase new assets immediately.
Depreciation benefits with tax
Let you forecast the exact revenue flow as the monthly payments options are fixed.
Tax benefits as it will get referred to as a trading expense.

Advantages of Asset Refinance

Allows obtaining working capital quickly.
The finance amount of asset refinance can be utilized to invest in business growth.
Let you predict proper cash flow because of the fixed monthly payback system.
Save your business from an emergency lack of cash flow situation.

Who Can Obtain Asset Finance?

Asset finances are primarily for every sort of business which includes SMEs. It allows acquiring a high-value item and provides support to the business’s development. To obtain asset finance for a business you need to have a registered NZBN number

Period of Asset Finance

Business owners can obtain asset financing from one to seven years. In some cases, if the asset is of higher value, then the time can get extended. The asset financing lender gives a specific period to pay the asset price back, including the interest amount to the business owner.

Another significant factor determining the period for which the lender will provide the financing is how long you will use the asset and how fast you have to pay the money back to the lender. The finance borrower must provide some proof to ensure they can make the payments easily.

Bottom Line

Asset finances are the short-term business finances that every company may require at some point in time. It assists your business in reaching the peak of success. So if your business needs assets to grow the manufacturing rate, asset finances are the superior to consider.

What is Asset Finance and how will it help to grow your Business?