Breaking Down Asset Finance
When you need to improve cash flow, you start looking at everything differently. Just like you might sell some of your high-value personal items when you need money for your rent or mortgage, you might start wishing you could transform the value of the inventory that’s just sitting around into working capital.
When you’re running a business, you’ll hurt your bottom line if you start selling inventory and other assets left and right. However, some banks and other types of financial institutions will provide you with the value of the assets you own without anything physically changing hands. Instead, you simply offer some of the existing assets on your balance sheet as collateral for an immediate cash loan.
While asset financing sounds attractive, is this type of bank loan really the best option for your company? Learn more about this type of business finance and how it might fit into your overall business growth.
What Is Asset Finance?
Asset finance is when you offer assets on your balance sheet in exchange for the cost of the assets in cash. To gain access to the funds offered by asset finance, you don’t have to physically give the asset to your bank, which means that you retain use of the asset. If you fail to repay your loan, however, your bank will seize your assets and sell them to recoup its losses.
The term “asset finance” is also used to refer to an agreement you make with your bank to lease or finance a new asset. Instead of taking on the full cost of the asset, your bank purchases it, and then you either rent or make payments of the asset over a set period.
While other types of business loans require complicated application processes, securing asset finance is usually as easy as proving the value of your existing or new assets. Since your bank will simply seize your assets if you fail to pay, it doesn’t view evaluating your creditworthiness as important in the context of asset finance as when you’re applying for a traditional loan.
Asset finance is one of the funding options you might want to pursue if you’re in need of a short-term loan to improve your working capital situation. This type of business finance usually has high-interest rates, and it’s best to pay back your asset finance loan as soon as your business needs have been met and you’ve improved your cash flow situation.
What Types of Asset Finance Are There?
As your bank gets ready to offer you asset finance, your loan officer will determine the nature of the assets you have to offer. All the assets your company possesses fall into one of three categories:
Banks consider a wide variety of heavy equipment to be hard assets. For instance, banks consider cars, trucks, commercial vehicles, agricultural equipment, and buses to be hard assets.
You’ll get a better deal if you use hard assets when you negotiate for asset finance since banks know that they can resell these items quickly and without a lot of hassle if you default on your loan. Banks may consider your inventory to be a hard asset depending on the type of inventory you carry.
Soft assets are items that have less clearly-defined value but are nonetheless critical to the operation of your business. For instance, computers, tablets, furniture, lighting, and even wall cables are examples of soft assets.
Your bank may consider certain inventory items to be soft assets, and any short-term investments you’ve made are also soft assets. This financial institution will generally consider your accounts receivable to be soft assets as well, which means it’s possible to offer your unpaid invoices as collateral. However, some banks will consider soft assets to be unsecured, in which case you’ll have to pay higher interest.
Intangible assets are types of soft assets that are hard to value. Only specialist lenders will offer loans with intangible assets as collateral, and examples of assets that banks commonly classify as intangible include intellectual property, patents, and software that you’ve developed.
How Does Asset Finance Work?
No matter which bank you work with, the process of obtaining asset finance will be similar. However, there are a few different ways to go about asset finance that you should be aware of before you proceed:
A hire purchase, also known as an instalment plan, is when you ask your bank to purchase a high-value item on your behalf that you pay for with periodic instalments. This type of asset finance allows you to purchase new assets without having to pay the cost up front, but you won’t be the legal owner of your new asset until you make your final payment.
Your bank will charge you a variety of fees to make your hire purchase agreement, but the seller will ship your new asset directly to you as soon as you’ve finalized the agreement with your bank and your bank pays the seller.
While a hire purchase doesn’t involve offering any of your existing assets as collateral, it is a type of asset finance since your new asset will belong to your bank until you repay your loan. A hire purchase won’t help you out if you’re having cash flow issues, but it will help you purchase new equipment that you need to grow your business.
A finance lease, also known as a capital lease or sales lease, is when your bank purchases an asset and rents it to you over a certain period of time. While you’ll have most of the rights and obligations of owning the asset, it won’t legally belong to you.
At the end of the rental term, you can either return the asset to your bank, sell it to a third party, or lease the asset again for a reduced cost. Since you never gain ownership of the asset, this type of agreement isn’t technically a form of true asset finance.
An operating lease is similar to a finance lease. Unlike a finance lease, however, your bank doesn’t transfer the rights and obligations of the asset to you, and your lender generally incorporates maintenance costs into the rental price of the asset.
While you would generally pursue a finance lease if you wanted to rent an item for its full economic life, an operating lease makes more sense if you plan to use an item for a lesser period. At the end of your operating lease, you’ll be able to return the asset, sell it, or lease it again.
Asset refinance is what most people mean when they refer to asset finance. With this type of agreement, you actually sell your assets to your bank, and your bank immediately leases them back to you with set terms.
Therefore, your bank technically takes possession of your assets, but you can still use them. Hard assets are easier to refinance, and your bank will probably offer better rates for hard assets. In many cases, however, you’ll also be able to finance your soft assets. Your bank will offer you the agreed-upon value of your assets when you finalize your asset refinance agreement.
Asset Finance vs. Asset-Based Lending
At first glance, asset finance and asset-based lending are identical. Both types of finance involve offering your assets to your bank in exchange for working capital. When you purchase an item with asset-based lending, however, the item itself serves as collateral, and when you make an asset finance agreement, you might use items other than the asset you’re purchasing as collateral.
For instance, a mortgage is a type of asset-based lending that you use to buy a house. The asset itself, which is the house, serves as collateral for this type of loan. To arrange an asset refinancing agreement, however, you may offer hard assets or inventory items as collateral but buy other items with the funds your bank provides. If you default on an asset refinancing agreement, therefore, your bank will seize the collateral assets instead of the assets you purchased with your loaned capital.
Real-World Example of Asset Finance
Imagine that you need a new piece of equipment to keep your business growing. Maybe you need an industrial machine like a printer or a lathe, or perhaps you need a new commercial truck to make sure that your supply line stays moving. Your new piece of equipment costs £100,000.
However, you don’t currently have sufficient cash flow to cover this expense. You have several open invoices totaling more than the cost of your desired asset, but none of these invoices will be due in time to make your purchase. Since your bottom line will be impacted if you don’t make your move now, you decide to look at the types of finance you have at your disposal.
After learning more about your situation, your bank determines that traditional loans aren’t the best options for your needs. Instead, it points out that you could finance some of your existing assets to gain the working capital you need to move your business forward. Your bank also mentions that you could finance your new asset and either rent or make payments on it over time.
You decide to move forward with the process of financing some of your existing assets to improve your cash flow situation. Your bank appraises your assets, and it finds that if you finance one of your commercial trucks and 10% of your inventory, you’ll be eligible for the £100,000 loan you need. You make an agreement with your bank, and the sum is deposited into your bank account.
Your bank now owns the assets you financed, but you’re still able to use them, and you retain most ownership rights. As soon as your open invoices come in, you pay off 50% of your asset finance agreement, and you pay off the rest in 10% monthly installments. Since you now have a lending relationship with your bank, getting asset finance or other types of finance will be easier in the future.
Pros and Cons of Asset Finance
Here are some of the most important benefits and detractors of asset finance:
- Flexibility: There are a variety of different asset finance options available, and you can either finance your existing assets or new assets.
- Cash flow: Asset finance gives you the cash flow you need to grow your business.
- Use rights: Even though your bank owns the assets you finance, you can still use them.
- Risk: If you default on your debt, you lose your assets.
- Inconvenience: Working with your bank to get the money that you don’t have isn’t the easiest way to drum up working capital.
- Lack of ownership: Certain types of asset finance agreements strip you of some of your ownership rights to your assets.
Asset Finance and CreditDigital
CreditDigital is a revolutionary new platform that gives you the flexibility of asset finance without taking away your ownership of your assets. With our cutting-edge invoice advance system, you can gain access to 100% of your invoice value immediately without having to wait for your customers to pay.
Our platform eliminates the need to go through the complicated and risky process of asset finance. The main reason businesses experience cash flow problems is that they have extended credit terms with their clients. Even though your sales are moving along smoothly, you won’t receive most of the money you’re owed for 30, 60, or even 120 days.
Waiting for invoices to arrive naturally makes you look for ways to get cash now, but with CreditDigital, you don’t have to sell your assets to your bank just to improve your cash flow. Instead, we provide you with your full invoice value the moment that your customers make purchases, and we give your customers up to a full year to make payment. No matter when your customer pays, however, you receive your full invoice value up front immediately.
When you work with us at CreditDigital, you avoid having to deal with your bank, and you don’t have to worry about evaluating the creditworthiness of your clients. Instead, we approve your customers instantly, and we take care of chasing down bad debt if any of your customers pay late.
If you like the idea of getting the cash you need right away but you feel uneasy giving your bank ownership over your hard-earned assets, CreditDigital is right for you. Sign up for our platform today; it only takes a few minutes, and feel free to contact us at any stage of the process if you need assistance.
Here are some of the related terms you might come across as you research asset finance:
Asset-based lending is similar to asset finance, but while you can use any of your existing or new assets to arrange an asset finance agreement, you can only use your new asset as collateral when you pursue asset-based lending.
Inventory finance is when you sell your inventory or use it as collateral to receive a loan.
Project finance is when you use financing to fund a long-term project. You pay back this type of loan as your project generates capital.