If you have a small business and need financing, one way to get it is through an asset financing company. There are many companies that include large banks and many small independent financing companies.
In as simple terms as possible, asset financing uses one or more of your assets as collateral for a loan. This is very similar to your mortgage. Your home is used as collateral for the loan with which you buy and make the repayments until you pay off the loan and interest, then the home will be completely yours.
When running a business, you can use your home as collateral for a loan by just taking out a second mortgage. However, your company also has assets and can be used as collateral. For example, you have credits and you have inventory. Both can be used as security. You can also buy expensive machines that you can also use as collateral for a loan. In addition, you may need to purchase a machine for your business and an asset financing company may use it as collateral to lend you funds.
Let’s now look at the details of asset financing and the pros and cons (there are always disadvantages of one kind or another).
First, let’s take a look at the accounts receivable. This is the money your customers owe you and a lender will want to check your customer list and find out how well your bills pay or not. You may owe a lot of money, but if your customers take 90 days or more to pay, it’s not good. So you may need a loan.
A lender usually only takes into account customers who pay in 60 days or less or those with a very good credit rating. They may not consider selling to other small businesses or individuals and may reduce the size. They usually base the amount they will lend on the value of accounts receivable at a rate of between 70% and 80% of the people who qualify. You can also get asset credits for the value of your inventory, but here the rate is usually around 50% of completed inventory.
One of the problems with lending assets in your accounts receivable is that they can (and many do) require your customers to pay them for you and send you money minus your commissions. This means that your company’s cash flow now goes to someone else. They can also maintain a larger reserve if their customers start taking longer to pay, which can make their lives more difficult.
However, the asset loan does not have to come from your credits, even if it is an asset. What is surprising is that while Bank of England figures show that loans available to SMEs remain good, there is a lack of knowledge about all the different types of financing available. 90% of SMEs still receive their business loans from their bank, which is never the best place to get them. The asset loan may correspond to the asset you wish to purchase, so you may need machinery and may be able to obtain a loan based on its value and probable depreciation.
There are several ways to do this, one of which is outsourcing where you share the cost of depreciation. The asset is yours, so it appears on your balance sheet and you can claim annotations. You can also claim VAT for the purchase, but you cannot claim it for depreciation. Another method is leasing where you are not the owner of the asset, but you lease it. In this case, the income you pay is deductible and you can also claim VAT for amortization.
If everything gets too complicated and can be, the best option is to talk to a financial agent who can guide you in the right direction.