Having the right equipment is vital to the success and longevity of any business. It helps increase efficiency, maximise productivity and maintain a competitive edge.
However, funding the purchase of major equipment is often easier said than done, and buying it outright may not always be feasible for all SMEs. That’s where Asset Finance comes in.
What is Asset Finance?
This is where the financier can provide funding for major assets like vehicles, machinery and equipment.
Here are some examples:
- Vehicles – Trucks, tractors or excavators
- Machinery – Lathes, milling machines, CNC or drilling machines
- Equipment – Forklifts, access equipment or telehandler
This kind of finance allows you to borrow up to 100% of the value of an asset and offers a fixed term and rate. You’ll make periodic payments until the equipment is paid off.
The amount of the loan you qualify for will depend upon the asset value and serves as collateral for the financing solution. Asset Finance saves the need to rely on property and real estate as security, or deal with the expensive nature of unsecured loans.
You definitely need to be confident that you’ll earn enough money with your business in the near future to repay the loan, as this is crucial for this type of financing to be successful. But as long as you can do that comfortably, Asset Finance is a smart move.
An Example
Say you’re looking to increase the efficiency of your warehouse. Your goal is to expedite the time it takes to place inventory in shelving and retrieve it when fulfilling customer orders. Maybe you’re currently using basic equipment like pallet jacks, but it’s just not efficient enough to keep up with demand. So you want to purchase a forklift.
An electric forklift with standard capacity might cost say $20,000 – $45,000 and up with an increase of $2,500 – $5,000 for a battery and charger. An internal combustion forklift with standard capacity may cost $20,000 – $50,000 and up. This makes it a significant investment, and many SMEs simply don’t have the money laying around to purchase a forklift upfront.
With Asset Finance, you could borrow up to 100% of the value of the forklift and pay it off over time making periodic payments. Rather than paying in one lump sum, you can stretch it out over a longer period, which makes it possible to make a large capital purchase like this. Once you’ve completed your payments, you own the forklift outright and it’s yours.
What are some specific benefits of Asset Finance?
There are three main reasons why business owners go this route. First, it offers flexible repayment options including interest-only periods.
Let’s face it. Running a business is expensive. The exact costs will vary depending upon the industry and size of a company, but business writer Gretchen Schmid says the initial startup costs for equipment usually range from $14,000 AUD on the low end to over $180,000 on the high end. And of course, most companies will end up making further investments in equipment as they grow and expand.
Asset Finance offers a framework that allows you to raise the necessary capital to get your business off the ground and keep adding or replacing equipment as needed. Rather than having to pay for a major expense like a forklift upfront, you can space it out over time, while having agreeable payment terms. And if you have interest-only periods, it can provide you with some additional financial breathing room.
Second, Asset Finance loans tend to be easier to qualify for than many other types of loans. You’ll find that many lenders aren’t overly stringent with their qualifications, which makes it ideal for business owners who have less than stellar credit. The application process is fairly straightforward, with many lenders providing approval within 48 hours. So, if you need to purchase equipment quickly, this is definitely a strategy to consider.
Third, it can give you a competitive advantage as well. By having access to key pieces of equipment, you can increase your efficiency and raise productivity levels in a way that would be impossible otherwise. You can boost your output, while reducing stress for your team members. Over time, this can have a dramatic impact on your bottom line and give you a competitive edge over others in your industry.
Bank vs Non-Bank Lenders
“There are several options available in the marketplace for obtaining equipment financing (Asset Finance),” explains ValuePenguin. “It can be obtained from sources ranging from traditional national lenders to smaller specialized online lenders.”
But at the end of the day, you have two main choices — a bank or a non-bank lender.
Going with a traditional lender like a major bank often comes with lower interest rates. However, they tend to be more strict with their credit standards. While this option may be suitable for well-established business owners with great credit, it’s not usually viable for less established SMEs with finances that aren’t in great shape.
Opting for a non-bank lender, on the other hand, usually means higher interest rates, but they’re a lot more flexible with their credit requirements. They’re also usually quicker with their loan application process. That’s why many business owners gravitate towards smaller, non-bank lenders — especially those who have struggled with their credit score.
How much money can you get?
The amount of money you borrow with an Asset Finance loan can vary significantly. But generally speaking, you can get as little as a few thousand dollars and as much as several hundred thousand.
There’s a lot of flexibility with this type of facility, and it should be sufficient for most SMEs to purchase the equipment they need. It’s just a matter of searching for a facility that meets your exact needs and reading through the details.
What are the typical interest rates and repayment terms?
Finally, what exactly can you expect to pay for interest rates?
According to ValuePenguin, fixed interest rates typically range anywhere from 4.00% – 12.75%. However, some can be higher at around 20%.
As for the length of repayment terms, some Asset Finance loans can be as short as several months, while longer ones can be as long as 10 years. Again, this will largely be determined by how much you borrow.
Fuelling growth with Asset Finance
Being able to obtain key equipment is a vital ingredient to the success of SMEs. After all, it’s hard to take the next step and move forward if you don’t have the right equipment.
Fortunately, modern business owners have plenty of options, with Asset Finance being one of the best. Taking the time to become familiar with how the process works and learn about the benefits should help you determine if it’s a smart move for your company.
We offer a range of flexible finance solutions to help businesses access the capital they need to grow. Speak to us today to explore your funding options.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
