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Home » Featured » What Is Asset Finance and How Does It Work?

What Is Asset Finance and How Does It Work - Capify Australia

What Is Asset Finance and How Does It Work?

  • June 16, 2023

An ideal funding option for companies that have the potential to expand but lack the cash flow to do so is asset finance. It is a flexible financing option that helps companies acquire the assets they need to prosper and expand.

A company can utilise business asset financing to guarantee the usage of machinery, equipment, and other assets instead of locking up substantial sums of money and interfering with cash flow.

Key Highlights

  • Asset finance allows businesses to acquire assets without tying up large amounts of capital upfront.
  • Asset finance helps businesses conserve working capital and maintain a healthy cash flow.
  • Businesses can choose from various asset finance agreements based on their needs and creditworthiness.
  • Interest rates and repayments in asset finance are determined by factors such as creditworthiness and asset value.
  • Fixed or variable interest rates and regular repayments over the agreed term are considerations for businesses.

What is Asset Finance?

Asset finance is a form of lending that allows businesses to acquire assets without tying up large amounts of capital upfront. Instead of making an outright purchase, companies can obtain asset loans or leases to secure the assets they require.

This finance option is particularly useful for businesses that rely heavily on expensive equipment, machinery, or vehicles, as it provides them with the means to acquire these assets while preserving their cash flow.

Asset finance operates on the principle of spreading the price of the asset over its useful life. Asset loans let you buy the things you need without having to give a sizable cash sum upfront. Throughout the loan term, you pay smaller, more frequent payments. In addition to the asset’s cost, fees and interest are assessed. Throughout the period, you have total access to the asset.

Businesses can choose from various asset finance options, such as hire purchase agreements, finance leases, or operating leases, depending on their specific needs. These options provide flexibility in terms of repayment structures and ownership transfers, ensuring that businesses can align their financial commitments with their cash flow patterns.

With the various options available, such as business asset finance and secured business loans, understanding the benefits of each can make a significant difference in optimising your financial strategy.

Using asset finance to acquire necessary tools, businesses can conserve their working capital and maintain a healthy cash flow, which is crucial for day-to-day operations and future growth opportunities.

Check our FAQ Section to find answers to common inquiries.

Types of Assets That Can be Financed

Hire Purchase

Businesses can opt for hire purchase agreements to finance assets such as vehicles, machinery, or equipment. With a hire purchase, the business pays a deposit and then makes regular repayments until ownership is transferred, making it an attractive option for those looking to secure assets while preserving cash flow.

Finance Lease

In a finance lease, the business pays regular lease payments for the utilisation of the asset over an agreed-upon term. While the business does not own the asset outright, finance leases provide flexibility and can be tailored to specific business requirements.

Equipment Leasing

Businesses can purchase essential equipment through equipment leasing without the hassle of ownership. Businesses that need specialist equipment benefit from this choice since it allows them to stay current with emerging technology and save money for other operational requirements.

Operating Leasing

Businesses have the freedom to use assets without the burden of ownership, thanks to operating leases. This method of financing allows firms to update to newer models as needed without taking on the hazards of asset ownership, and it is frequently used for vehicles and technological equipment.

Asset Refinance

Asset refinance allows businesses to release the capital tied up in existing assets. By leveraging the value of owned assets, businesses can access funds for growth, expansion, or other financial needs while still using the assets themselves.

Check more about Capify secured low-doc business finance.

How Does Asset Finance Work?

Asset financing starts when a company decides what assets it needs and contacts a lender or financial institution for help. Depending on their particular needs, the business can select from a variety of asset finance agreements. Business asset finance options include hire purchases, finance leases, and operating leases, among others.

The finance agreement is made after the lender assesses the company’s creditworthiness and the asset’s value. These agreements outline the terms, including the repayment structure, duration, and ownership transfer conditions, ensuring businesses can tailor the agreement to align with their financial capabilities and objectives.

Interest rates and repayments in asset finance are determined based on factors such as the creditworthiness of the business, the asset’s value, and the chosen finance agreement.

Interest rates can be fixed or vary, and repayments can be made in regular instalments over the agreed term. It’s important for businesses to consider these details and calculate the total cost of finance, including interest when evaluating the viability of asset finance options.

How to Get Asset Finance

Eligibility Criteria for Asset Finance

Lenders typically assess a business’s creditworthiness, financial stability, and ability to pay back the asset loan when considering asset finance applications.

Required Documents

  • Financial statements
  • Tax returns
  • Bank statements
  • Proof of identity
  • Information about the assets being financed

Advantages of Asset Finance

  • Asset finance allows businesses to acquire necessary assets without making a significant upfront investment, preserving their cash flow for other operational needs.
  • Businesses can choose from various asset loans options, such as hire purchase or finance leases, allowing them to tailor repayment structures to their financial capabilities and objectives.
  • Certain types of asset finance, like operating leases, may provide businesses with tax advantages, allowing them to deduct lease payments as an operating expense.
  • By utilising asset finance, businesses can stay up-to-date with the latest equipment or technology, enabling them to remain competitive and efficient in their operations.
  • With asset finance, businesses can avoid the risks associated with asset ownership, such as depreciation or obsolescence, as they can upgrade to newer assets when needed.
  • As asset loans are typically classified as off-balance-sheet financing, businesses can maintain a healthier financial position and improve their financial ratios.
  • Using asset finance enables businesses to preserve their borrowing capacity for other strategic initiatives or unforeseen circumstances.
  • The process of acquiring asset finance is often streamlined and efficient, allowing businesses to secure the necessary assets quickly and conveniently.

Disadvantages of Asset Finance

  • Although asset finance offers flexibility, businesses must take into account the whole cost of financing, which might be greater due to interest rates and other costs.
  • Businesses do not have ownership rights under certain asset finance agreements, such as operating leases, meaning they are unable to claim the asset as their own.
  • Companies that participate in asset finance arrangements commit to particular conditions and payback commitments, which may reduce their future flexibility.
  • The perception of the company’s financial health may be impacted by some asset financing methods that increase liabilities on the balance sheet.
  • A decrease in the asset’s value may make a lender less eager to lend money or result in higher interest rates when asset finance is secured against the asset itself.
  • Early repayment of asset finance agreements may incur additional charges or penalties, which businesses need to consider when evaluating their financing options.

Why Choose Capify?

Capify values the importance of asset financing for your business. We offer flexible solutions tailored to your needs, whether you’re upgrading equipment, purchasing vehicles, or acquiring machinery, we are here to help.

Our holistic assessment considers more than just creditworthiness, allowing us to find solutions even if you’ve faced financial challenges.

With personalised service from our expert team, quick approvals, and efficient funding, Capify helps you seize opportunities and drive growth. Contact us today to explore how we can fuel your success.

Considering finance but unsure where to start? Give our team a call on 1300 760 930 or click Get Started. We’re here to talk through your needs and help you access funds in as little as 24 hours.

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