What is Asset Finance

What is Asset Finance?

Asset financing allows businesses the opportunity to grow and expand, without taking money out of cash flow / working capital for the business.

Many companies prefer asset finance so as not to tie up large amounts of capital in a purchase. Instead of paying one large sum upfront, spread the cost over time with smaller, regular payments.

Asset Finance can be used to finance cars, business 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?

A business asset is a valuable resource that supports the operation and growth of a company. Assets can include tangible items such as vehicles, equipment, or other resources that drive business activity, generate revenue, and enhance efficiency.

In essence, an asset is anything that contributes to a business’s success and value creation.

Examples can include:

• Machinery

• Equipment

• Vehicles

• Fit Out

• Plant

• Inventory

These resources play a crucial role in driving business operations and generating value.

What are the most common types of Asset Finance?

Equipment Finance / Chattel Mortgage

A chattel mortgage is a type of financing arrangement where a business borrows funds to purchase an asset, such as equipment or vehicles, and the asset itself serves as security for the loan. The business takes ownership of the asset upfront, while the lender holds a mortgage over it until the loan is fully repaid.

Chattel mortgages are often used for acquiring business assets, offering benefits such as flexible repayment terms, potential tax advantages, and ownership of the asset from the start of the agreement.

Operating Lease / Rental

An operating lease, also known as a rental agreement, is a financing option where a business rents an asset for a specified period and at the end, there is an agreed amount to pay to acquire ownership.

The finance provider retains ownership of the asset, and the business makes regular rental payments to use it. The business will claim the repayments and GST on the repayments.

Operating leases are ideal for businesses that need flexibility, want to avoid upfront costs, or prefer to keep assets off their balance sheet.

Sale & Buyback

A sale and buyback with finance is a financial arrangement where a business sells an owned asset, such as equipment or vehicles, to a finance provider and then finances it back. This allows the business to free up cash tied in the asset while continuing to use it for operations.

Key benefits of a sale and buyback arrangement include:

-         Improved cash flow without disrupting business operations.

-         Access to working capital for other business needs.

-         Flexibility in repayment terms and potential tax advantages.

This option is ideal for businesses looking to unlock the value of existing assets while retaining access to them. There are time period restrictions with lenders, most have within 30-60 days but some lenders can do this up to 12 months after purchasing.

How long is the Asset Finance term?

Asset financing terms typically range from 12 to 60 months, depending on the asset's nature and its expected usable lifespan.

Other factors influencing the term include the business's repayment preferences. Shorter terms result in higher monthly repayments but lower total interest costs. Conversely, longer terms offer lower monthly repayments but increase the overall interest paid. Balancing these factors is key to selecting the right financing option for your needs.

Who Can Benefit from Asset Financing?

Asset finance is a versatile solution available to businesses of all sizes. Whether you're a registered company, trust or sole trader, asset financing can work for you. Many businesses use it to take advantage of government schemes like the instant asset write-off.

While businesses may use asset financing for various purposes, it can offer significant benefits in two main ways:

Securing the Asset’s Use

High-cost business assets can strain cash flow. Asset financing allows businesses to acquire essential assets for growth and expansion without depleting working capital or hindering investment and operations in other areas.

Accessing Capital

For businesses facing cash flow challenges, asset financing provides a way to access a secure line of credit using the assets they already own. High-value assets can serve as collateral for securing working capital funding, offering an effective solution when traditional lenders are not an option.

How Asset Financing Supports Business Growth

The Australian Bureau of Statistics reports that limited access to funding is one of the biggest challenges small to medium-sized businesses encounter.

Asset financing offers a solution by enabling businesses to grow sustainably and expand without placing undue strain on working capital or experiencing cash flow gaps.

It allows companies to spread the cost of new assets over time, freeing up capital to be used more effectively in other areas of the business.

With access to updated equipment and machinery, businesses can boost productivity and take on new customers, driving growth and success.