While growing a business, many small to medium-sized enterprise (SME) owners may make the mistake of constantly buying new assets to increase production.
However, constantly buying assets or equipment outright can often take a toll on a business’s working capital, greatly affecting day-to-day operations.
To combat this, many SMEs use asset financing. Also called “chattel mortgage,” asset financing is the process of buying essential vehicles, equipment, or buildings to use as collateral for a short-term loan. The loan amount depends on whether the possessions are high-value assets.
By leveraging asset financing as a business strategy for further growth, your business can gain better cash flow from the pledged assets and spread the repayment over time.
This blog post discusses five reasons why asset financing can be a great strategy for small businesses. Read on to learn how to best use this strategy for further financial success.
1. Secure The Use Of Assets
Asset financing allows a sole trader or business owners to get a loan for buying equipment, vehicles, accounts receivable, and other business assets on their balance sheets.
Rather than buying their company’s assets at full value, they can use regular repayments that match the value of the asset, possibly leading to less interest.
Unlike traditional financing, short-term funding that utilises possessions like equipment or cars generally allows businesses to use the asset and avoid high maintenance costs.
Through short-term asset finance, businesses could gain extra capital and increase production over time while gaining back the finance amount they spent to buy the assets. Entering into operating leases for assets can prevent businesses from spending more to immediately own those assets.
For example, a bakery owner needs new equipment. Rather than paying a lump sum for new stoves and office equipment, they can use a business asset finance strategy to gain the latest baking technology and repay the equipment loan in regular payments.
To know what assets they can use, it’s crucial that businesses continuously update their balance sheet, where any company-owned asset appears.
By detailing the types of assets they own, it becomes easier to keep a track record of old or new assets that they can use to secure a loan.
2. Secure A Loan Through Assets
Asset financing allows companies to use their existing assets to secure a loan.
Imagine asset financing as a short-term lease, where items are used as short-term investments, and businesses can gain cash equal to their value rather than spending a large sum to own them immediately.
For instance, many small to medium-sized Australian businesses may need equipment like solar panels or other tools to grow their company. However, they typically don’t always need a lot of equipment.
Without this strategy and securing a lease agreement to gain necessary assets for a limited period, a business may lose money if they do not make use of the asset. They may grow the assets within their balance sheet but decrease financial growth through constant spending.
How Does Asset Finance Work, And How Can It Help Secure A Loan?
Here are the steps detailing asset-based lending:
A business needs extra cash to finance its operating lease, employee wages, or other company expenses.
The business contacts a lender or finance company, where they borrow money and enter a finance agreement to use the funds to gain assets over a short loan term.
They gain funds for the asset depending on its value, with varying interest rates depending on this value.
The business uses the assets and gains back the money they spent on them over the fixed term.
The business repays the loan through regular instalments until the end of its contract period.
By using assets to secure a loan, companies can continuously finance their servicing costs and various expenses without outright buying the assets. This strategy could help businesses save money, making it cheaper than other financial options.
3. Can Be Cheaper Than Other Business Financing Options
Asset financing or chattel mortgage is typically cheaper than traditional financing options because it saves money from buying multiple assets.
Rather than saving up large amounts of money to buy multiple assets in one final payment, companies can use a finance lease to utilise the needed assets and regain the cash they spent.
If companies focus on saving money to buy a new asset, it may delay their growth.
Another reason why it’s more cost-effective is that it focuses on the asset’s value rather than the company’s credit rating.
A key cost-effective strategy is a hire purchase. A hire purchase uses the company’s credit to gain the asset and loan.
The lender owns the asset as a security interest until the company repays the loan in the final instalment or balloon payment when taking the interest rate into account.
Using asset finance, the company and the lender can save money, letting them finance business needs efficiently.
4. Protect Your Cash Flow
Cash flow is an integral part of any business’s growth. By entering an operating lease and gaining necessary assets, companies potentially save great amounts of capital that they can instead use to buy stock, pay wages, and strengthen production.
Since the company agrees on a loan based on the value of its assets, it enters into manageable loan agreements that may be within the short or medium term.
As the interest rate depends on the asset value, the company gains a better perspective on how much they must repay. Subsequently, the company could acquire extra time to finance operations and wages, using the assets to serve their customers.
Doing so lets them focus on important expenses rather than constantly saving profits to buy new equipment.
The lender can also benefit since the asset is used as collateral and may be taken back due to failure to repay the loan.
With an asset finance lease, companies can prioritise larger expenses to increase success while using top-quality assets to simultaneously grow profits.
5. Spread The Cost Over Time
Like any loan, asset finance uses a set loan duration that companies follow to repay the loan. Because it has fixed payment periods, companies can spread the cost of this operating lease over time.
Sole traders or smaller companies typically focus more on gaining profit while minimising expenses. Through this strategy, they can receive funds and assets matching the company’s needs without spending more than necessary.
They can finance necessary costs and meet the loan’s deadline thanks to fixed payment periods.
Conclusion
Asset financing can be a great SME strategy to save capital, gain assets, and work within a manageable lease period.
When you need to finance your business’s growth through business loans, visit Lumi today and learn more about flexible lending options for your business.
Got more questions? Reach out to our team via phone at 1300 005 864 or email sales@lumi.com.au. If you’re ready to apply for a business loan, click here.
