Getting a loan for your business can be tricky and time-consuming. In some cases, the lender needs collateral before giving you a loan. This can be difficult for anyone without assets but sometimes this is an advantage because you can apply for asset financing.
Asset financing is when a company uses its balance sheet assets (including short-term investments), inventory and accounts receivable to lend money. With asset finance, you must provide the lender with a security interest in your assets.
Before you can apply for asset finance, you need to know the ins and outs. You need to know how it works, who can apply and where to apply.
With this article, we take you through everything you need to know about the concept of asset finance.
Asset Financing vs Asset-based Lending
Asset financing and asset-based lending are two terms that refer to the same thing. When you apply for asset lending, you are applying for money to buy an asset such as a home or a car. The car or house you want to buy becomes collateral for the loan and can be taken away if you default on the loan.
Asset financing means a business borrows money against assets they currently own. Asset financing loans are usually short-term loans and are used for things such as paying wages or buying raw materials. Businesses are not buying new assets but rather using their current assets to make up working cash flow.
Now that you know the difference between these two, you can apply for the right one. If you want to buy an asset, apply for asset-based lending. For those looking to make up working capital and have an asset, you can apply for asset financing.
Types of Asset Financing
There are six types of asset financing:
Hire Purchase
Hire purchase allows you to buy a new asset in instalments instead of paying a large upfront fee. Once you have paid off the loan, you will own the asset. In some cases, the asset appears as a positive item in your balance sheet, but it is owned by the lender till the loan is paid off.
Once you have paid off the loan, you will need to pay a small fee called the Purchase Option Fee. The fee is required to transfer ownership of the asset to you. In some cases the purchase option fee is R1.
Finance Lease/Capital Lease
A finance lease is an agreement where a lender will buy an asset on your behalf and rent it out to you. You will make monthly payments during the rental period until you cover the cost, plus interest.
Once done with paying, you can decide to extend the rental period, return the asset or sell it to a third party on behalf of the lender. With financing leasing you will never own the asset, but you are responsible for its insurance and maintenance during the rental.
Equipment Lease
Equipment leasing is similar to finance leasing, except with leasing equipment you can own the equipment at the end of the contract. During the loan period, you make scheduled payments to the lender, and you are responsible for the maintenance of the equipment.
Once the lease is complete, you can extend it, return the equipment, upgrade or buy it using a balloon payment.
Operating Lease
Operating leases are used if you need special equipment for a short period of time or you never want to own it. You rent the asset over a short time and make regular payments for the time you have it. You can upgrade the equipment regularly, sometimes during the rental period.
Operating leases are usually cheaper than finance leases because the cost is based on the equipment costs. The company you rent the equipment from is responsible for its maintenance.
Asset Refinancing
Asset refinancing works in two ways. In the first, your company pledges its assets as security against a loan. The assets become collateral for the loan.
If you default, the lender can take your assets and sell them to recover any funds lost. If you pay the loan in full, your assets will return.
The second way is asset-based lending. In this agreement, you sell an asset to a finance company for an agreed fee. Once you have a fee, the finance company will rent the asset back to you. This allows you to free up money and still use the asset in the repayment period.
Vehicle Asset Finance/ Contract Hire
This type of asset finance allows you to find a provider who will maintain the vehicle for you. During the period you pay installments over an agreed period. In some cases, fleet management services may be included in the contract hire costs.
Once the agreement period is over, the provider is responsible for the disposal of the vehicle.
Where to Apply for Asset Finance
The following are some of the platforms that offer different types of asset financing.
Small Enterprise Finance Agency (Sefa)
Sefa has an asset finance funding programme designed to help businesses get new or used moveable assets.
Standard Bank
Standard Bank has a business asset financing offering designed to help businesses fund their cash flow needs or new equipment purchases.
Merchant Capital has a range of asset financing products designed for small businesses.
Lula (Lulalend)
Amongst its many loan offers, Lula also has business equipment funding designed for businesses of all sizes.
The above platforms are just some of the places where you can get asset financing. Go through each one to find the one that has the best rates for your business.
