How Does Asset Financing Work And How Do I Get It?

If you run a small business and need some finance, one of the ways to get it is through an asset finance company. There are an awful lot of these companies around and they include major banks and very many smaller independent finance companies.

Put in the simplest way possible, asset financing uses one or some of your assets as security for a loan. This is very similar to your mortgage. Your home is used as security for the loan with which to buy it and you make the repayments until you have paid off the loan and interest and then the home is entirely yours.

When you run a business you could, perhaps, use your home as security for a loan simply by taking out a second mortgage. However, your business has assets also and these can be used as security. For instance you have receivables and you have inventory. Both of these can be used as security. You may also have expensive machinery which you have purchased and which you could also use as security for a loan. In addition, you might need to purchase a piece of machinery for your business, and an asset finance company may use that as security for lending you funds.

Now let us take a look at the ins and outs of asset financing and the upsides and the downsides (there are always downsides of one sort or another).

First, let us consider your receivables. This is the money that is owed to you by your customers, and a lender will want to take a look at your list of customers and how well they do, or do not, pay your invoices. You may have a lot of money owing to you, but if your customers take 90 days or more to pay you that is not good. That might even be why you need a loan in the first place!

A lender will usually only consider customers that pay in 60 days or less, or ones that have a very strong credit rating. They may not consider sales to other small businesses or individuals and could discount those. They generally base the amount they will lend on the values of receivables at a rate of some 70% to 80% of those that are eligible. You can also get asset based loans on the value of your inventory, but here the rate is usually around 50% of finished inventory.

Here is one of the problems with asset based lending on your receivables: they may – and many do – require that your customers pay them rather than you, and then they send you cash less their charges. This means that your company's cash flow is now going to someone else. They might also keep a larger reserve if your customers start to take longer to pay, which could make your life difficult.

However, asset lending doesn't have to be on your receivables, although they are an asset. What is surprising is that although Bank of England figures show that lending available for SME's is still good, there is a lack of knowledge about all the different types of finance available. 90% of SME's still get their business loans from their bank which is by no means always the best place to get it. Asset lending can be on the asset that you wish to purchase, so you might need a piece of machinery and you can get a loan based on its' value and likely depreciation.

There are a couple of ways of doing this, one of which is hire purchase where you spread the cost of repayments. The asset is yours so it appears on your balance sheet and you can claim writing down allowances. You can also reclaim the VAT on the purchase, but you can't claim it on the repayments. Another method is finance lease where you don't own the asset but lease it. In this case the rent you pay is tax deductible and you can claim VAT back on the repayments also.

If it all seems to be getting too complicated, and it can be, your best bet is to talk to a finance broker who can steer you in the right direction.

Independent Business Finance is a broker and an asset finance company which has access to funding of all sorts for SME's and will listen to your needs and ideas, and then source the best financial option for your business.