What is Asset Finance?

Asset finance is a great way for Aussie businesses to secure the capital required to grow without tying up large amounts of cash. This popular funding option gives businesses more access to equipment, plant, vehicles and machinery while spreading the cost out over a longer amount of time.

What is Asset Finance?

Asset finance is a funding solution that allows businesses to acquire equipment, vehicles, machinery or other business assets without paying the full amount upfront. 

It involves spreading the cost of these assets over a period, making it easier to manage cash flow and maintain liquidity.

What is Considered an Asset?

When discussing asset finance, an asset is any tangible resource or property owned or controlled by a business. Your typical business assets include:

• Buildings
• Machinery
• Equipment
• Vehicles
• Plant
• Inventory
• Land

What are the Different Types of Asset Finance Loans?

There are a range of different asset finance lending solutions depending on the unique requirements of your business. Each type offers different terms and conditions that cater to various commercial needs. The main types of asset finance include: 

Hire Purchase

Hire Purchase (HP) is a method where a finance company buys an asset and allows a business to pay it off over time. Over the agreement's term, the business pays for the asset in smaller more manageable instalments. Once all payments are made, including a nominal final transfer fee, the business gains full ownership of the asset. This arrangement enables businesses to acquire expensive equipment without a large upfront cost. HP is particularly suitable for acquiring long-term assets like vehicles or machinery.

Equipment Finance

Equipment finance is where a business rents equipment from a vendor or finance company for a fixed period. During this term, the business makes regular payments to use the asset. At the end of the lease term, the business has several options: extend the lease, return the equipment, upgrade to newer equipment or purchase the asset. This type of financing is beneficial for businesses needing up-to-date equipment without committing to a purchase, allowing flexibility and potentially offering tax advantages. Equipment finance can be used for anything from laptops and printers to vehicles and more.

Operating Lease

An operating lease is a rental agreement where a business leases an asset for a relatively short period. The business makes regular payments to use the asset but doesn't aim to own it. At the end of the lease term, the asset is returned to the finance company. This type of lease is suitable for businesses that require equipment for temporary projects or want to avoid the risks of asset depreciation. Operating leases often result in lower monthly payments compared to other financing options and can offer tax benefits, as lease payments are generally treated as operating expenses.

Finance Lease

A finance lease is where a finance company purchases an asset and rents it to a business for a set period. This period usually covers a significant part of the asset's useful life. During the lease, the business makes regular payments to the finance company and takes responsibility for the maintenance and insurance of the asset. At the end of the lease term, the business may have options to extend the lease, return the asset or sell it. This arrangement is suitable for businesses that need long-term use of an asset without ever wanting to own it.

Asset-Based Finance

Asset-based finance is where a business uses its assets as collateral to secure funding. This allows companies to raise capital based on the value of assets they already own, such as machinery, inventory, accounts receivable or real estate. The lender provides a loan proportionate to the value of these assets and if the business fails to repay the loan, the lender has the right to seize the collateral. This type of finance is particularly useful for businesses that need to leverage existing assets to gain additional working capital, manage cash flow or finance growth initiatives. It offers a way to access funds without selling off assets.

How Does Asset Finance Work?

A finance company or vendor typically purchases an asset on behalf of a business. The business then makes regular payments to use the asset. At the end of the term, depending on the type of asset finance, the business may own the asset, return it, extend the lease or sell it.

Who is Suitable for an Asset Finance Loan?

The beauty of asset finance is that it’s suitable for all types and sizes of businesses in Australia. It can be used to acquire big-ticket equipment or machinery without having to put forward large amounts of money. Asset finance loans are suitable for sole traders, contractors and companies. 

How Long Do Asset Finance Loans Last?

The term of your asset finance will vary depending on the type, size and repayment schedule of the loan. They typically range from 1-5 years.

The Benefits of Asset Finance Loans

Asset finance has become a popular lending solution for businesses all over Australia because of the following benefits:

• Low to no upfront capital required 
• Spreads the cost of big-ticket items over time, making them more affordable
• Simplifies financial management and supports positive cash flow
• The financed asset often serves as collateral
• Maintenance costs can be covered by the finance company
• Frees up capital, allowing for investment in other areas of your business
• The risk of asset depreciation can sit with the finance provider
• Some asset finance options include provisions for the replacement of the asset if it malfunctions during the lease or loan period
• Often more cost-effective compared to other business financing methods

The Cons of Asset Finance Loans

While asset finance can be a great financial tool to support the growth of your business, you should also keep in mind these potential disadvantages:

• Ownership of the asset remains with the provider until full payment is made, and in some finance types, ownership may never transfer to you
• Asset repossession is a risk if payment obligations are not met
• Asset financing typically involves longer terms
• Liability for damage to the asset not covered by the agreement may fall on you
• Usage limitations, such as annual mileage for vehicles may apply

An Asset Finance Example

A healthcare clinic specialises in advanced medical diagnostics and owns state-of-the-art imaging equipment. The clinic wants to expand its services to include new, cutting-edge treatments but lacks the immediate funds for such an investment. To finance this expansion the clinic opts for asset-based financing, using its valuable imaging equipment as collateral.

The clinic enters into an agreement with a finance company, putting the imaging equipment forward as security against the loan. This loan is then strategically invested in acquiring the latest medical technologies and hiring specialised staff, enabling the clinic to offer a broader range of services. 

The clinic makes regular payments on the loan, balancing its expansion costs with its operational income. Once the loan and interest are fully repaid, the ownership of the imaging equipment is transferred to the clinic, which by then has successfully broadened its market reach and enhanced its service offerings.

Can Asset Finance Help with Business Growth?

Asset finance can be a great financial tool for businesses at all stages of their development. Whether you need new equipment to handle increased sales or machinery to handle projects with a large scope, asset-based lending can get you the equipment you need to take your business to that next level.

Tying up large sums of capital into expensive equipment can be a risk for businesses and that’s why choosing an asset finance solution is so common with Australian businesses. 

How Much Can You Borrow With an Asset Finance Loan?

The amount of money you can borrow will depend on the lender, the financial position of your business and the value of the asset you are looking to use. It can range from as small as $10,000 up into the millions.

To work out your borrowing capacity, it’s best to consult with a professional finance broker like Your Advisor Group on the Gold Coast.

Conclusion

Asset finance is a flexible and practical finance solution for businesses looking to acquire assets without impacting their cash flow or requiring massive upfront capital. It offers various options to suit different business needs and can be a great way to grow your business.

To speak to a professional asset finance broker on the Gold Coast, get in touch with Your Advisor Group.