If your first question is, “What is asset finance?” then we’ll give that answer to you as a freebie. Asset financing is using your “balance sheet assets;” the standard assets of your business such as accounts receivable, inventory, and your short-term investments to secure a business loan.
Asset financing is unusual in that a business can simply promise some of their assets to a lender in exchange for an immediate influx of cash. For this reason, asset financing is almost exclusively used for short-term things like providing some working capital to keep the business healthy, or as a short-term loan that won’t interrupt business flow with high interest rates to juggle.
Business that seek an asset finance solution typically offer up their account receivable assets, but offering up inventory assets are also growing as a popular alternative. By using their existing assets to finance a short-term quick loan, businesses can safely avoid the rates of a traditional business loan, and skip over some of the more difficult qualifications that they may not meet.
As a concept, asset financing is fairly straightforward. But the effects and benefits of asset financing solutions often raise questions for businesses considering using asset finance solutions to put more cash into the business. Here are five of the most commonly asked questions about asset finance solutions, and their answers:
“What if my inventory isn’t the best? Could I use defective inventory as an asset pledge?”
Lots of borrowing businesses want to know if they can creatively repurpose their inventory that is damaged, outdated, or was in some way not up to their best standards. Alternatively, businesses might be worried that they won’t receive the full possible asset finance results if a few of their inventory items could potentially be considered defective or faulty. That’s really up to the supplier as to what would constitute as a faulty good that would no longer be fit to use as an asset.
If you think the good might not comply with the Sales of Goods Act of 1979, then chances are, it won’t be an effective asset to utilize. Most of the time, your asset financier isn’t going to be qualified to determine if the goods are fit to use, so that’s a discussion that should be held with your inventory supplier in question.
If it’s really questionable, it’s probably not wise to use as your asset. Consider opting for another asset like your accounts receivable or any short-term investments you might have at the moment. It might be a better alternative than waiting around for your inventory to be checked out and approved to use as an asset in an asset financing situation.
“If my business doesn’t meet the requirements of business loans, does my business also not qualify for asset financing?”
To qualify for a business loan, your business would typically have to…
- Have a great credit score of over 700.
- Have a detailed business plan for the next few years.
- Perfectly accurate profit and loss statements.
- Past balance sheets, income statements, tax forms, and all necessary paperwork up to date.
- Good financial history with no late payments or outstanding bills.
- Good collateral on hand.
- Personal guarantees.
Basically, businesses need to have a spotless financial record for the past two years or so (depending on the type of loan you’re applying for.) But that financial history won’t affect asset financing solutions.
You can qualify for asset financing even if you don’t qualify for a traditional business loan. Your credit score isn’t usually a factor, you won’t have to make a personal guarantee on the assets pledged, and you won’t need to provide extensive paperwork history except for the specific asset in question; rather than having to provide paperwork about every asset you’ve ever acquired like with a business loan.
You’ll still might have to provide you asset financier with the appropriate records for things like current business performance, your current credit score, or any late payments. This can vary, so make sure you know what records to have at the ready, in case the financer requires it.
But asset financing is an easier, faster, and more direct solution for many businesses. It won’t provide you with a long-term plan for financing like you’d have with a business loan. But you also don’t have to worry about committing to a long-term loan, while still accessing the asset finance funds for the needs of your business’ immediate future.
“What are the benefits of asset finance solutions?”
Asset financing helps cash flow, it can help businesses update any obsolete equipment, the only security is taken in the actual asset, and it also frees up capital for the business to incorporate as you see fit.
It’s not just newer, small business that can benefit from asset financing, however. Even larger companies that are already firmly established who are looking for an easy solution to upgrade their equipment can put the old equipment up for asset financing, use their inventory, or any investments they want.
Any business can use asset financing to help bring in cash flow whenever they need it, as long as they have some viable form of asset to pledge in exchange. That’s all there is to it.
This level of flexibility and inclusiveness makes asset financing a better solution for businesses who just need some extra cash for working capital or to cover some unforeseen costs. Asset financing is accessible to businesses of all sizes, levels, and histories.
If you’re using asset financing to secure equipment for your business to run, there are options that allow you to fully own the equipment as discussed at the end of your lease agreement, at which time the asset financier will give you the title. You could even use that equipment as an asset when it comes time to replace them however many years down the line.
Contract periods for this type of asset financing can last from six months to three years, typically. The goal is to make the monthly payments on the asset financing as affordable for your business as possible, which is another benefit over traditional bank loans.
Getting in and out of the contract in less time and without spending more money will help your business bounce back and put the assets financed to good use without heavy payments holding you back and creating a cycle.
A few rules about financing equipment:
- It has to be vital to running your business, such as production machinery or shipment vehicles.
- It has to be able to be easily removed from the premises, so that it can be taken as security if needed.
Other than that, anything you need to put your business together will be considered by most asset financiers. If you’re able to explain the need for the equipment you’re trying to finance, it’s usually approved. This can mean that if you need mannequins for your boutique, a cash register, or portable heaters for your catering company… you can probably get it financed easily.
Another benefit for businesses seeking an asset financing solution is the speed at which businesses are approved for and receive their financing. As long as you’re able to provide all the necessary history in a timely fashion, the asset financier can usually check everything out and process your application in a little as a day or two.
Many businesses receive their finance funding within 3-5 business days, but it could take 1-2 weeks, depending on the scale of your request.
“How is asset financing different than a bank or small business loan?”
The terms are significantly shorter, usually lasting no longer than five or six years at most. Unlike overdrafts, asset financing isn’t repayable on demand. Asset financing solutions for your business are secured loans, and it offers greater flexibility than a bank loan.
Asset financing also comes in a variety of forms to work with whatever you need financed in order to help your business prosper, whereas a bank would require you to use their funds for only a specific and limited range of functions. You can use asset financing in a multitude of ways, and the agreements are tailored to that meet the demands of that need.
In addition, a wider range of businesses are capable of receiving and benefit from asset financing than at a bank or even with some small business loans. Existing business can benefit from asset finance solutions just as much as new startups, but the best part is that they can tailor their asset financing solution to suit their differing needs; such as replacing or leasing equipment rather than freeing up working capital or covering small immediate costs.
“Why should I not just purchase assets outright for myself if I have the money to do so?”
For situations like equipment purchases, it’s certainly just as easy to make the purchase in cash upfront and be done with it. That’s always an option if you have the capital to do so. But for many business owners, they can’t afford to tie up so much capital so early on in the equipment’s working lifespan at your business.
Like some lease-to-own programs, this kind of asset financing also allows you to spread out the cost of the purchase over a longer period of time, keeping working capital flowing where it should be… in your business rather than going straight to your suppliers and you having to scrape by for the next quarter.
In addition to the benefits of spreading the cost of the purchase, you’re retaining valuable cash flow to invest in other areas of your business that you may have been neglecting to foster, or that could provide you a greater return on a different investment.
If you want to calculate whether or not asset financing is more cost effective than the outright purchasing of goods, you can do so by using a discounted cash flow analysis to find the financial outcomes of the two options and establish what’s best for your business.
Many business owners also want to know if they can use their personal money or assets to secure asset financing for their business, or for their personal finance. You can’t use your business assets to finance a personal loan, and you can’t use your personal asset to finance your business needs (unless it’s somehow tied into the business, in which case the asset financier would have to approve it as a viable asset to pledge).
Personal loans are for a different purpose, and the specific purpose of asset finance solutions are to provide your business with a quickly accessible source of cash in exchange for a viable asset. Asset financing is made for commercial purposes, and so you should be using commercial assets.
Asset Financing Solutions to Meet the Needs of Any Business
If you have the assets available to pledge, then you can use asset financing to assist you in ways that a traditional small business loan might not have the flexibility to handle. Whether you a large-scale company looking to lease more equipment to accommodate your growing business, or if you’re a small startup looking to stay afloat in those difficult first few years… asset financing could be a good solution to provide your business with what it needs.
Because the terms are so much relatively shorter than bank loan terms, you’re not locked into any agreement that stops being beneficial to you. You can apply for asset financing in rapid succession after repaying the older ones if need be, or you can use it as a quick, one-time financing solution to an immediate problem.
The beauty of asset financing is that it’s adaptable enough to use to your advantage, regardless of what business element you need financing for, or when you need the financing by. Funds or goods are often available for approved businesses to start using within a matter of days since most applicants are reviewed and approved within 24 hours or so.