When you have a compelling business case to grow a section of your business, it’s time to act and turn potential into reality. The right equipment can transform your productivity, capacity to innovate, your processes and profitability. If the equipment cannot be purchased from working capital, the finance options are either a bank loan or asset finance. What are the differences between these two types of lending?
Banks have reined in their lending policies for SMEs over the past decade. Many businesses report that their bank simply declines an application despite a good trading history and strong credit record. Others are dismayed at the security their bank requires and are not comfortable with putting a family home at risk. Obtaining a bank loan is a lengthy process with much paperwork.
On the plus side, interest rates are still low and can be fixed for the term of the loan. There are also other avenues of business credit available other than mainstream banks. You may get better terms with a business loan from a specialist lender with knowledge of your sector. This topic will be covered in greater depth in our Guide to Business Loans.
The Alternative: Asset Finance
Asset finance and leasing can help you acquire essential equipment without taking out large cash loans. Instead of taking a cash loan to purchase an asset, a finance or leasing company acquires the asset on your behalf and can hire or leases it to you in exchange for monthly repayments. At the end of the term there are two options:
- You return the asset to the leasing company (leasing), or
- You keep the asset, perhaps after paying a final lump sum (hire purchase)
Unlike traditional finance, until repayments have been made, ownership of the asset remains with the leasing company. This has several positive implications for borrowers:
- It is easier to get approval for asset finance as there is less risk for the lender (as the asset belongs to them, if you default on repayments, they can simply take it back).
- You can acquire a high-value asset for which you may have insufficient credit to get a business loan.
- The asset itself acts as security for the ‘loan’, so there is not normally any further collateral required – good news for start-ups looking for an affordable means of acquiring vital equipment.
- For equipment that quickly becomes obsolete, leasing is often more cost-effective than ownership. At the end of the lease there may be the option to upgrade to a newer asset on the same or similar terms.
- Some leasing companies provide servicing and repairs as part of the contract.
Unless you have a genuine need to own the asset outright from the outset, rapid access means plans can be enacted and a return on investment generated immediately.
How To Obtain Asset Finance
Asset finance lease companies tend to specialise in specific markets – e.g. agricultural plant, retail EPOS systems etc. Engaging an independent finance broker such as Business Finance Solutions Ltd gives you the best probability of securing a good deal. That’s because we know the different markets and the lending requirements of individual providers. Download our Asset Finance Guide for an in-depth explanation of how this funding option works.
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