Asset financing is a process that involves using a company’s balance sheet assets, such as their inventory, short-term investments, and any accounts receivable so that they can access funds from a lender. The business that’s borrowing the money in asset financing needs to provide a security interest in their assets, which makes this lending option very different to traditional funding.
While asset financing as a concept has been around for quite some time, many people still don’t fully understand how it works. There are a lot of misconceptions around the product, even though asset-based lending accounts for £16 billion of the UK lending economy.
Why Asset Financing is Good for Companies
A common misconception is that asset financing is an expensive way to borrow money. However, the truth is that the interest rates associated with asset funding are very competitive with most traditional types of funding. Any kind of business can benefit from asset funding – not just the companies that are struggling with their finances. If you need capital to fund purchases, or simply accelerate your organisation’s growth, then asset financing could be the right solution for you. Typically, asset funding is recommended for:
- Small businesses that need to get ahead of the rising costs of growth – asset financing spreads the costs of purchases across a more manageable timeframe.
- Companies who need quicker decisions about financing so that they can get the products and equipment they need as fast as possible.
- Organisations that need their payment terms to be spread over long, or short terms which allow for negotiation while funds are being paid back.
Small businesses are particularly well-suited to asset finance because this form of lending allows these companies to get the equipment that they need to compete with other major organisations. With asset funding, SMEs can trade and grow without having to access numerous lines of unsecured and secure credit from various avenues. Payments can be made over a fixed period, which means that companies also have an easier time planning their budget.
When Is Asset Financing Right for You?
As with any kind of loan or funding, specific financial strategies will be better for some businesses than others. Since it can be difficult to determine what type of funding you need to support your business at first glance, it pays to examine whether asset financing could be the right opportunity before you start exploring other types of capital.
Some of the most common reasons to choose asset funding as your solution for immediate capital include:
- You want to save money: Rental or asset leasing allows companies to pay exclusively for the value of the asset during the lifetime in which that asset is usable. You won’t need to pay a premium for your new technology or machinery which ensures that you can get returns for your investments as quickly as possible.
- You need more financial control: Asset financing for businesses allows company leaders to maintain more control over their monthly expenses, so they’re less likely to be overwhelmed by costs. This is important when budget management is critical to your organisation.
- You want in-built risk management: In a world where business strategies and technology keeps evolving all the time, asset management solutions allow you to reduce your risk of your technology becoming obsolete. You can upgrade and react to the needs of your customers as quickly as possible, to stay ahead of the competition.
- You need a quick decision: Deals around asset financing can be made fairly quickly, which means that companies can identify the solution that suits their company best and minimise the time they spend waiting for a bank to respond. Because assets come with security for lenders, achieving acceptance is typically much easier.
- You’re looking for working capital: When you agree to an asset financing deal, your cash reserves remain protected and available, because you’re not paying for the things that you need in a single lump sum. This means that you have more liquid cash left over for other opportunities for growth when they arise.
- You want to avoid risk: Any business can be volatile, and if you’re nervous that you’re going to default on your finance agreement, asset management means that you only lose the asset, rather than being liable to lose your home or other parts of your business.
Asset financing is a simple and effective solution for many companies in search of ways to get the money that they need to grow. Don’t underestimate it.