Is asset finance a viable alternative to a traditional business loan?

Before we take a closer look at asset finance, it’s important to review what it is as well as how it differs from a traditional business loan.

Asset finance is a funding option for businesses to acquire new assets or upgrade existing ones. With asset finance, the lender provides funding to purchase the asset, and the business repays the loan over a set period, typically with interest.

On the other hand, a traditional business loan is a lump sum of money lent to a business for a set period, typically at a fixed interest rate. The loan is often used to finance working capital, expansion, or other business needs.

So, what’s the difference between asset finance and a traditional business loan?

The primary difference between asset finance and traditional business loans is the way the funding is used. Asset finance specifically provides funding for acquiring or upgrading assets, while traditional business loans can be used for a broader range of purposes.

With asset finance, the asset itself often serves as collateral for the loan, while traditional business loans may require additional collateral, such as property or other assets.

Additionally, the repayment terms of asset finance may be more flexible and tied to the asset's lifespan, while traditional business loans are typically repaid over a fixed term. Ultimately, the choice between asset finance and traditional business loans depends on your business's specific needs and circumstances.

But, let’s take a closer look at what each type of finance can actually be used for.

What you can do with asset finance

With asset finance, you can acquire assets that are needed for your business operations without having to pay the full amount upfront. You can also use asset finance to acquire new equipment, upgrade or maintain existing equipment, purchase vehicles, and other assets that are necessary for the growth of your business.

How you can use a traditional business loan

In contrast, with a traditional business loan, you can use the funds for a variety of purposes such as working capital, inventory purchase, debt consolidation, and other business-related expenses. However, there are often more restrictions on how you can use the funds, and you may need to provide collateral or a personal guarantee.

Overall, asset finance provides more flexibility in terms of the assets you can acquire and the repayment terms, whereas traditional business loans may offer more flexibility in how you can use the funds.

So which finance type offers larger credit sums?

Generally, asset finance allows you to borrow a larger amount of money than traditional business loans, as the loan is secured against the asset being financed. This means that the value of the asset being financed can determine the amount that you can borrow.

But, don’t take our word for it, consider the pros and cons of both for yourself.

Pros of asset finance:

• Enables businesses to acquire the assets they need without having to pay the full cost upfront
• Repayment terms are typically flexible and can be tailored to suit the business's cash flow
• The asset serves as collateral, so businesses with a limited credit history or poor credit score may still be able to access financing

Pros of traditional business loans:

• Typically offer larger loan amounts than asset finance
• May have lower interest rates than asset finance
• Can be used for a wider range of business purposes, not just for purchasing specific assets

Cons of asset finance

• High-interest rates and fees may make it a more expensive option compared to traditional business loans.
• The lender has the right to repossess the asset if the business defaults on repayments, which can cause financial hardship for the business.
• The application process can be more time-consuming and require more documentation compared to traditional business loans.

Cons of traditional business loans

• The application process can be more stringent, with banks requiring a lot of documentation and collateral.
• Traditional business loans may have longer repayment terms, which means businesses could end up paying more interest over time.
• Approval for traditional business loans can be harder to obtain for businesses with poor credit histories or limited operating histories.

So how do the eligibility requirements differ between the two?

To qualify for asset finance, you will typically need to provide proof of ownership or a purchase agreement for the asset you wish to finance, as well as proof of income and a good credit record. The lender will also consider the age and condition of the asset as well as its potential resale value.

To qualify for a traditional business loan, you will typically need to provide a comprehensive business plan, financial statements, tax returns, and bank statements. The lender will also consider your credit history and the experience of the business owners, as well as the collateral that can be offered as security for the loan. The loan amount and interest rate will be based on the financial health of the business and its ability to repay the loan.

Can asset finance really be considered a viable alternative to a transitional business loan?

Yes, asset finance can be considered an alternative to traditional business loans. Both options provide your business with access to funding, but they differ in terms of collateral and repayment structures. With traditional business loans, your business typically needs to provide collateral, such as property or equipment, and repay the loan over a fixed term with interest.

In contrast, asset finance allows you to finance specific assets, such as vehicles or machinery, and repay the loan over the asset's useful life with interest.

Asset finance can be a suitable option for you if you do not have the necessary collateral for a traditional loan, or if you prefer to match your repayments to the lifespan of the asset being financed.

Many South African businesses that do not qualify for a large term loan, will be able to access asset finance from a specialist lender provided that they meet the lender’s requirements and can show that their business is an ongoing concern. Don’t forget to check out our other pieces about asset finance and if you’re looking for asset finance, our collection of providers is a great place to start your search.