If your business needs to make money fast, asset financing could be an easy option. Here is all you need to know about the 5 different types of asset finance in one place.
Businesses need a constant source of financing and that is no secret. Any SME owner knows that finance streams are the best way to keep their businesses afloat. Asset financing is one such finance tool, capable of helping your business when it needs it most. There are five main types of asset finance, each of which we will examine in greater detail within this article.
So, if your business needs cash flow freed up from somewhere – keep reading. This article might mean the difference between scaling up and scaling down.
What is Asset Financing?
Asset finance is a way to gain cash flow for your business. Using this type of financing, assets are placed against the value of loans, or vice versa. You may pay incrementally for assets, or place assets as collateral to gain loans. Asset financing helps businesses to get funds for assets, while repaying the loans over time.
The Five Types of Asset Financing
There are five main types of asset financing which involve businesses acquiring assets over time. We have expanded on each of these types below.
1 – Leasing
Probably the most popular form of asset financing, leasing is common in everyday business. The financier purchases an asset and allows the borrower to use it for specified purposes and times. In exchange for this, the borrower pays lease payments, while the asset remains permanently in the hands of the financier. This allows your business to gain the equipment it needs without buying it outright for the full cost.
2 – Hire Purchase
On the other hand, you might enter into a hire purchase agreement. Similar in nature to a lease agreement, the hire purchase agreement allows the borrower to make several payments to eventually buy the equipment. Although reminiscent of the lease agreement, once you make enough payments the ownership of the equipment will transfer to you. You will eventually pay off the debt and own the gear. Whereas with leasing there is no future purchase.
3 – Chattel Mortgages
Chattel mortgages are common to businesses who want to finance the purchase of vehicles, machinery, or expensive equipment. In this case, the financier is usually a banker or loan administrator, The financier offers the loan – or mortgage- to the buyer with security interest. The asset acts as collateral for the loan so that if you miss payments, it can be removed. Once the loan is fully repaid, you will own the item and cease repayments.
4 – Equipment Financing
This type of asset procurement is specifically tailored towards facilitating the acquisition of new equipment for SMEs. Equipment finance allows businesses to obtain the necessary equipment when they need it, while simultaneously preserving their existing cash flow. Equipment finance can include leases, hire purchasing and chattel mortgages, as well as other means of acquiring finance specifically for equipment procurement. This type of asset financing is usually a first port of call for SME owners.
5 – Vendor Financing
Vendor Financing is a unique method of asset finance. During this type of agreement, you enter a contract with the manufacturer or supplier which creates the asset. This simplified version of the purchasing process allows them to offer buyers convenient and immediate access to their products. Often the financier defers payment until a later date or encourages repayments through a lease agreement.
This type of asset financing is mainly used for stock measures. If you require a large volume of stock which you know you will sell for a large order, you can defer the payment of that order until you have sold the goods. This type of agreement only works between suppliers who have faith in their customers, and long-term clients.
Asset Financing Allows Versatility in Financing Options for SMEs
The upshot of all this is that asset finance is a valuable tool that empowers both businesses and individual owners to access the necessary assets or funds they need to continue their projects. Understanding the five types – that’s leasing, hire purchase, chattel mortgaging, equipment finance and vendor finance – provides a firmer foundation for upping cash flow in future. Each type offers a unique take on raising funds to finance your business. There are advantages and disadvantages to both, but in the end, you receive the equipment you need at a price you can afford… and isn’t that what good business is all about?