Asset Finance

What is asset finance?

If you don’t have the cash to buy expensive equipment for your business, you can apply for financing. Asset finance provides you with a wide range of options to buy much-needed assets for your business. Asset finance is also referred to as equipment finance.

Asset financing is a loan that enables you to buy all types of equipment you need to operate your business. It works on the same basis as any other loan.

You borrow money over an agreed term and pay your installments monthly until the loan is settled. It offers you a way to finance expensive machinery and other assets, which you normally won’t be able to do out of your cash flow. You can get finance for a range of tangible assets, except real estate.

Who needs asset finance?

If you're a young startup, for example, equipment finance is essential to get your business off the ground. These loans require a costly financial commitment. It is, therefore, crucial to consider what type of equipment you need the most. You also have to ensure that you get a tailored equipment finance plan that offers you the best terms.

Leasing versus purchasing equipment

Depending on your unique situation, you can either lease equipment for your operations, or you can apply for an equipment finance loan. A number of factors will determine the option that’ll work best for you. These include your credit rating and the life expectancy of the assets you want to acquire, to name but two.

Other very important considerations are the state of your cash flow, tax and VAT implications for financing these assets, and whether you want to own the equipment.

Buy or lease?

Buying equipment is only a good idea if you have the capital resources to do so. Although you will own these assets, their lifespan is usually limited and this will necessitate renewed expense upon their replacement. Although repayments stretch over several years when leasing equipment, you won’t need to raise huge amounts of capital to purchase these assets. Replacement is also more cost-effective. 

Spoiled for choice

There are several finance options available to business owners. These include:

Asset leasing

The lender finances your equipment. You are allowed to use it for your operations while paying monthly instalments for the duration of the lease term. At the end of the term, you can choose to pay the residual on the loan which gives you full ownership. You can also refinance the residual or sell the equipment in order to lease new equipment.

The benefits of asset leasing are many:

• The fixed rates of this option make budgeting easier.
• Contract terms are designed around your specific needs.
• There’s a possibility to get tax reductions on your lease payments.

Equipment rental

This option is much the same as asset leasing. You rent the assets from your financier by paying a monthly fee over a set term. Upon conclusion of the contract, you have the choice to return the equipment, continue renting or purchase it from the financier at a fair price.

The benefits of this option include: 

• Monthly instalments and interest are fixed which helps with budgeting.
• You know the costs involved in advance.
• Contract terms are tailored to your needs.
• It’s more economical to pay upfront as some assets might have a short lifespan.
• Since the equipment is regarded as an asset, the debt is not seen as an impediment.
• You might be able to add residual value to decrease your monthly instalments.
• There could be some tax advantages to rental (consult your accountant about this).

Commercial chattel mortgage 

Chattel mortgages give you ownership of movable assets such as vehicles or machinery when you acquire them through an equipment loan. You basically mortgage the asset to your finance provider. You’ll own the asset once your loan contract has been settled, as your financier will remove the interest on it.

Advantages of this option include:

• You’re able to budget properly as interest and monthly instalments are fixed.
• Terms can range from 1 to 7 years which gives you more flexibility.
• If you choose to add residual value, you'll have a smaller monthly repayment to settle.
• You may benefit from tax deductions as the asset is only used for business purposes.

Cashflow funding

This product allows you to borrow against your future cash flow – your invoices that still have to be paid. If your business has longer payment terms, you can benefit from your future revenue, enabling you to prosper.

The advantages are obvious

• Approval is swift.
• Terms are tailored to your needs.
• You can immediately improve your cashflow. 

What can be considered equipment?

Equipment refers to all the tangible resources you need to equip a person/thing or enable an operation or enterprise.

A wide range of equipment qualifies for financing. Here are but a few:

• Construction equipment
• Yellow metal machinery
• Office equipment
• Medical equipment
• Mining equipment
• Industrial equipment
• Food and beverage equipment
• Technology hardware
• IT software
• Security equipment
• Speciality vehicles

Main advantages of asset financing

• Fixed-rate market terms are easier to manage.
• Repayments are structured to your cashflow ability.
• You don’t have the burden of substantial cash outputs.
• You can use your available capital to grow your business.
• You can tailor the loan to the lifespan of your assets.
• You safeguard your creditworthiness. Most traditional loans decrease your creditworthiness with lenders.
• You enjoy longer terms than in the traditional finance market. Payment structures are more attractive, and you benefit from the repayment process.
• There will also be tax advantages that differ depending on the type of financing you choose, but it’s always a good idea to speak to your accountant to educate yourself on the detail! 

Important considerations when deciding which assets to finance

• Do you need extra equipment or do you want to replace redundant assets?
• What type of equipment do you want to finance. The brands and what you will use them for are important considerations.
• Are the equipment new, used, or overhauled?
• Are you going to use these assets continuously, or just periodically? 

Financial considerations

It’s vital to keep the following factors in mind before applying for asset financing:

• Which will work best in your situation; a fixed-percentage or prime-based lending rate?
• Pricing structures for rental, lease, and refinancing differ.
• Loan interest rates can fluctuate.
• Older equipment with lower residual value will cost you more to finance.
• These loans require a lot of collateral and you can even get a loan of up to a 100%. The average though is 80%. You'll therefore have to be able to afford a considerable down payment on your loan. 

Asset finance providers: Banks versus online financiers

Banks

• The application process can be tedious as banks can take weeks to analyse your info.
• Banks usually require an initial application to enable them to determine whether you meet their base qualification criteria. This can make it very complicated for startups.
• If your business has a low credit score, you will not be considered for a loan.
• Your annual revenue and the time you have been in business are crucial determinators for qualification.
• Should you meet a bank’s minimum requirements, the onus is on you to prove the viability of your business. You will have to submit financial statements of at least the past two years, as well as your tax documents.
• Banks might even ask for your tax returns and personal bank statements.

Online equipment finance providers

• Application processes are much swifter and usually hassle-free.
• Although they’ll ask for information on your current debts, expenses and income, they won’t scrutinise the info.
• Upon receipt of your financial statements, you’ll get a loan offer within a few days.
• Your chances of approval are much higher than with traditional banks.
• The minimum qualification requirements are less, but you will, unfortunately, pay higher interest rates, as the lender has to counterbalance his risk.
• Although credit reports form part of the process, you can still qualify with a lower credit score. 

What to know about asset-finance interest rates

• Rates start at approximately 8% per year and can be even higher.
• Interest could be charged as a fixed percentage or can be prime-linked.
• The type of asset you wish to finance, and your chosen finance option will determine your interest rate.

Breathe new life into your business

Equipment financing can benefit you in a number of ways.

• You can eliminate upfront cash outlays as your monthly repayments are reasonable.
• Your available capital can be used for other purposes.
• You have the benefit of getting up to 100% financing which you won’t get at banks.
• When your equipment has reached its maximum lifespan, you can replace it swiftly.
• You have the freedom to manage and enhance your credit score as these loans don’t have any effect on your credit capacity. It gives you, therefore, more flexibility to make sound business decisions.

The application process

How to apply will depend on your choice of lender

If you choose a bank, you will have to meet with the loan representative. This route is more cumbersome, as you’ll have to produce a myriad of documentation to prove that your business is viable. Some banks will even request your business plan. You can wait weeks for approval, and therefore this option won’t work if you need financing in a hurry.

If you take the alternative-lender route, you can apply online and expect a swift response. Qualifying criteria are also not that rigid and require less documentation. Your credit score also needn’t be as high as for bank financing. The outcome is much quicker and you can get your money within days.

Vital questions to ask your asset finance provider

1. Do you charge upfront fees? The answer should be no.
2. Can I buy equipment from whom I choose? You need to have the freedom to decide who’ll meet your requirements.
3. Do you assist small to medium-sized businesses? Some financiers are only interested in the big guns.
4. How much experience do you have in the equipment finance industry? You need to know that your lender will be able to assist you with decisions that are in your best interest.
5. Can you offer me a choice of repayment options? You want the flexibility to make informed choices about repayments in the long term.
6. Do I have a choice between leasing or buying? And, if I choose to lease can I still buy equipment at a later stage? It’s important to accommodate changes in your business practices that may arise at a later stage.
7. Do you have a fair turnaround time? Your lender should understand the concept that time is money. 

Your questions answered

1. How long are the loan terms?
   
   Most equipment loans are repayable from 3 up to 10 years.
   
   
2. Is financed equipment an asset?
   
   Equipment is a fixed long-term asset. You are not able to sell it before the end of your loan term, therefore it doesn’t give you access to cash. 
   
   
3. How do I incorporate financed equipment in my bookkeeping?
   
   Since you need equipment to operate your business, it will be categorized as “noncurrent assets”. 

Asset finance is a must for any growing business

The purpose of equipment financing is to enhance your daily operations and to enable you to grow your business without having to plan for huge cash layouts. It protects your cashflow and is crucial to your business success.

Having the means to conduct business is vital and investing in the right equipment is therefore a no-brainer. It’s the perfect option if your business is still in its fledgling stage, as you probably won’t be able to afford expensive equipment from the onset.

The onus is on you

It offers you the opportunity to use your valuable resources for your business operations, but the onus is still on you to ensure that you're able to afford an equipment loan or lease. Sound business practices and budgeting, therefore, form the basis of the equipment financing process.

The secret lies in choosing your lender very carefully. You need to collaborate with a credit professional who’ll offer you sound advice on the process and potential pitfalls to look out for.