Businesses need funds to operate, thrive, and grow. Funds are needed for working capital, to buy inventory, purchase equipment, hire staff, re-finance existing loans, seize new opportunities, and fund growth. One of the ways to secure needed funds is through asset financing.
Balance Sheet Assets Can Be Used for Asset Financing
An asset is defined as something owned or controlled by an enterprise having a value that the enterprise expects will provide economic benefits. Assets have value because they help generate revenue or can be converted into cash. Assets provide value because they are used to produce goods or services, fund operations, and drive business growth. Current assets include cash and cash equivalents, marketable securities, accounts receivable, and inventory. Non-current assets include facilities, equipment, buildings, and property.
What is Asset Financing?
Asset financing describes a type of borrowing that uses the assets of a business to secure short-term financing. Typically, the borrowing company pledges some balance sheet assets to quickly get a cash loan. Traditional financing generally requires a longer process involving business planning, cash flow projections, and repayment forecasting. Traditional lenders judge a business’s loan worthiness based on the company’s creditworthiness and its future business prospects.
There are five types of asset financing:
- Hire purchase. In this case, a lender purchases an asset on behalf of a borrower. The borrower makes payments to pay off the asset over a defined term, with the opportunity to own the asset at the end of the term.
- Equipment lease. In this case, a borrower will simply agree to a contract to rent and use the equipment for a period, with accompanying periodic payments, without the option to own the equipment.
- Operating lease. In this case, a short-term lease is agreed upon with payments during the time the asset is used.
- Finance lease. A finance lease is a long-term lease in which a borrower takes responsibility for maintaining an asset during its life, with the option to purchase the asset at the end of the lease term.
- Asset refinance. An asset refinance entails a business pledging assets that it owns to use as collateral to secure a loan.
The Advantages and Disadvantages of Asset Financing
The advantages are that companies can acquire assets without large upfront costs and spread the financing expense over time. The financing is based on the asset itself, so this approach is attractive for businesses that may not qualify for traditional financing. The major disadvantage is that the lender may seize the pledged asset if the loan defaults.
How to Obtain Asset Financing
First, determine the company’s eligibility for asset financing. Second, choose the appropriate type of financing. Third, select a provider. That entails researching different financing providers and their rates, terms, and conditions. Fourth, evaluate the contractual obligations, repossession risks, and asset ownership conditions.
Businesses can secure asset financing through banks, leasing companies, online lenders, and financing specialists.
Seek Expert Business Financing Assistance
Contact CAB Capital, based in Mt. Pleasant, SC. We offer small businesses custom-matched financing solutions that can be faster or more flexible than other financing solutions. We have access to a vast suite of more than 150 products from a group of 67 different lenders to ensure you get the funds and the terms you are looking for.