What is Asset Financing?

Updated on 20th June 2023

Asset financing allows businesses the opportunity to grow and expand, even if they don’t have enough liquidity or access to working capital.

In fact, some companies prefer asset finance so as not to tie up large amounts of capital in a purchase. Rather, they may prefer to spread the payments out over a period of time and not disrupt cash flow.

What is asset finance?

Asset finance can be used to secure the use of equipment, plant, machinery or any other business assets.

The term asset financing can also be used to refer to the use of an existing asset by a business as collateral to secure access to funding or a line of credit. This allows businesses to unlock capital they could otherwise have access to without having to sell their assets.

What is an asset?

Assets, in this context, are any tangible resources or properties that are owned or controlled by the business.

Examples can include:

• Buildings
• Machinery
• Equipment
• Vehicles
• Plant
• Inventory
• Land

What are the different types of asset financing?

Hire Purchase

With a hire purchase arrangement, the finance company or third party purchases the asset for the business to use. Over the set period of time, the business makes payments (to hire) to the financier. When the final payment is made and set term is up, the business has the option to purchase the asset for an additional, nominal fee.

Equipment Finance

This flexible funding arrangement works similarly to the option above, only once the set period of repayments is over the business will have a few options:

1. Purchase the asset.

2. Extend the lease on the asset.

3. Return the asset to the finance company which bought it.

Operating Lease

This is a short-term and flexible funding facility that works like the equipment lease but the length of the facility is shorter.

This makes the overall costs lower but the individual monthly payments higher. It is more expensive in the long-term but for businesses needing temporary access to machinery or equipment, it can be more economical. 

Financial Lease

Unlike other types of asset financing, the financial lease arrangement sees the ownership and obligations transferred onto the business and not the financing company. This means ongoing maintenance and repairs of the asset remain the responsibility of the business itself.

Asset-based Finance

Asset based finance allows businesses to access the assets they need and release capital tied up in the value of assets already owned. By using your assets as collateral to access funds to acquire new assets, you’re accessing a line of credit to increase your working capital.

In conjunction with asset-based finance, or instead of, a business can use their accounts receivable for access to quick working capital. This is called invoice finance. 

How long is the Asset financing term?

The terms offered with asset financing facilities can range from 24 to 60 months. 

The exact length of the facility will depend on the asset itself and its ‘usable’ lifespan. Other factors that can affect the facility term are how quickly a business wants to pay back the sum. Short-term credit arrangements may incur higher repayments but lower overall interest while predictable long-term repayments can be easier for many businesses’ cash flow needs. 

Who is Asset Financing For?

The truth is that asset finance can be used by any business, and businesses of all sizes do. This flexible funding solution can and has been used by registered companies, contractors, and sole traders.

Some businesses simply use asset financing to take advantage of the government’s instant asset write-off scheme. We recommend speaking to a lending specialist if you’re considering this avenue.

Businesses may use asset financing for a few reasons, but there are two main purposes by which a business can benefit from an asset financing facility. 

1. Securing the Asset’s Use

A high cost business asset can put a lot of pressure on a company’s cash flow. Asset financing helps companies to access an asset they need to grow and expand without compromising its working capital or ability to continue investing and operating in other areas of the business.

2. Accessing Capital

Asset finance can also help businesses who already have issues with cash flow to access a secure line of credit through the assets they already own. High-value assets can be used as collateral to secure working capital funding. For businesses who need more cash flow but cannot get an approval from a traditional lender, accessing capital through asset finance can be an effective solution. 

Asset Finance: An example

Here’s an example of asset financing in action to illustrate both how it works and how a business can benefit. 

The Company

A growing mid-sized civil engineering company requires several new pieces of plant machinery to increase its workload capacity. There is a significant increase in demand, and the business will struggle to meet deadlines and take on new customers without expanding its capacity.

The Problem 

The business doesn’t have enough liquidity to pay for the equipment upfront. , 

The Solution

The business enters into an agreement with an asset financing company to lease the plant machinery for the next 50 months.With the use of the new machinery, the  civil engineering company can meet its current deadlines, take on more contracts, and increase revenue.

The Benefit

Once the contract has finished, the civil engineering company can return the assets to the financing company or purchase the machinery for a nominal fee. The company has successfully expanded without compromising its ability to grow, current operations or cash flow. 

How Asset Financing Helps a Business to Grow

According to the Australian Bureau of Statistics, lack of access to funding is one of the greatest obstacles small to medium-sized businesses face.

Asset financing provides businesses with a way to grow sustainably and expand without overly pressuring their working capital and experiencing cash flow gaps. It’s a way to spread the cost of new assets out over time and avoid tying up money that can be better used in other areas of the business. With access to new equipment and machinery, the company can become more productive and take on new customers.

Source: Australian Bureau of Statistics

Similarly, businesses with capital tied up in assets they already own, can use asset financing to boost cash flow in a fast, flexible way. 

By using assets as collateral to access a line of credit, you can negotiate early payment/bulk buying discounts with suppliers, and allocate your additional resources to the areas that will fuel the most growth.

What are the Benefits of Asset Financing?

Asset finance is a highly flexible funding solution that offers businesses many benefits.

Secure Assets

The key benefit of asset financing is the ability of a business to secure access to needed equipment and machinery that can help it grow. 

With these new assets, a business can generate more revenue than the cost of the monthly repayments and become more profitable. 

No Upfront Costs

Up to 100% of the purchase cost of the asset can be funded without initial cost to the business. This allows businesses to grow and capitalise on opportunities without negatively impacting working capital. 

No Depreciation

When you normally purchase a high-value asset outright, the risk of depreciation falls on your business. With asset financing, the risk of depreciation is usually the responsibility of the finance company. 

Tax Deductible Repayments

Making regular repayments as part of an asset financing solution can also be a more tax-efficient way to fund the purchase of an asset as the repayments are considered tax-deductible expenses.

Increased Cash Flow

There are no upfront payments with asset finance which allows businesses to spread the cost of an asset over an extended period of time. 

This allows for better working capital management and the ability to invest in the areas of the business that will generate more revenue and growth.

Lower Maintenance Costs

Depending on the terms of the asset financing arrangement, the finance company (i.e., the third party) may be responsible for the maintenance and repair of the asset. This means you can avoid any significant and unexpected expenses. Moreover, the asset will be kept in a condition where it can continue to work for your business.

No Collateral

In asset finance, the value of the asset itself is used as security, so there’s no need generally to use a home or property as collateral. Asset financing allows for a much more flexible and less-strict arrangement than loans through traditional lenders. 

Asset Financing – why ScotPac is the right choice?

For over 35 years, ScotPac has been providing asset finance and working capital solutions to small and medium sized businesses across Australia. As the largest non-banking lender in the country, our specialists know a thing or two about what asset financing is and how it can be best customised for your particular business.

Take the pressure of your business’s working capital, unlock the value in your existing assets, and enjoy access to the working capital you need to take advantage of the growth opportunity in front of you… with ScotPac!

We offer a range of flexible asset finance solutions to help businesses access the funding and equipment they need to grow. If you need some help funding a business purchase or want to know more about unlocking the capital tied up in your existing assets, call us today to see how we can help.