Asset finance is rapidly becoming a preferred funding option for Australian businesses, allowing them to acquire, use, and benefit from high-value items such as vehicles, machinery, and equipment without the need for a large upfront payment. By spreading costs over time with manageable payments, businesses can enjoy the benefits of these assets while easing the pressure on cash flow. Furthermore, asset finance also allows businesses to leverage existing high-value assets as collateral for loans, providing a pathway for growth and expansion.
What Is Asset Finance?
Asset finance is a financial solution that enables businesses to use the value of assets like vehicles, buildings, and equipment to fund their operations. Rather than making a substantial cash payment to acquire these assets outright, asset finance allows businesses to spread the cost over time through smaller, regular payments. This arrangement includes additional fees and interest but grants the business full use of the assets throughout the term.
Common examples of asset finance include equipment leasing and hire purchase. Depending on the type of asset finance chosen, the responsibility for maintaining the asset—such as repairs, insurance, and other associated costs—may fall either on the business or the finance company. At the end of the finance term, the asset might either be returned to the finance provider, or ownership may be transferred to the business.
Another form of asset finance is asset refinance, which allows businesses to unlock the cash value of assets they already own. In this arrangement, the assets are used as collateral to secure a loan. This type of financing is particularly useful for businesses looking to raise capital without selling off valuable assets.
Understanding Assets
In the context of asset finance, an asset is any item of property that holds intrinsic value. Common examples include buildings, vehicles, and equipment. Businesses rely on these assets not only to support their daily operations but also as tools for securing loans, paying off debts, or meeting other financial commitments.
Types of Asset Finance
Asset finance comes in various forms, each tailored to meet different business needs:
Hire Purchase (HP)
Hire purchase is a straightforward form of asset finance where businesses can acquire new assets through installment payments rather than a lump sum. This process is similar to buying household items on finance. The asset, which might be a vehicle, plant, or equipment, typically appears as a positive item on the company’s balance sheet from the start of the agreement. However, the asset remains the property of the finance provider until the final installment is paid.
One key feature of hire purchase is that the business is responsible for maintaining the assets throughout the finance term. Upon completion of the payments, ownership of the asset transfers to the business, often requiring a small “Purchase Option Fee”.
Finance Lease
In a finance lease arrangement, a leasing firm purchases an asset on behalf of the business and then rents it out to the business for a specified period. The business makes monthly payments during what’s known as the “primary rental period” until the cost of the assets, plus interest, is covered. After this period, the business may choose to extend the lease, return the asset, or sell it on behalf of the leasing firm, potentially sharing in the sale proceeds.
Unlike hire purchase, the business never owns the assets but is responsible for insurance and maintenance costs during the lease period.
Equipment Leasing
Similar to a finance lease, equipment leasing provides businesses with the option to purchase the assets at the end of the lease term. Throughout the lease, the business makes regular payments to rent the equipment from a vendor or leasing firm. The leasing company typically handles the maintenance of the equipment.
At the end of the lease, the business has several options: extend the lease, return the asset, upgrade to newer equipment, or purchase the asset outright by making a balloon payment. Equipment leasing is especially advantageous for companies that need to upgrade their equipment regularly or lack the working capital to buy assets outright.
Operating Lease
An operating lease is ideal for businesses that require specialised equipment for a limited time or do not wish to own the assets. This lease type allows businesses to rent the assets for a short or medium term, with regular payments made during the rental period. One significant advantage of an operating lease is the ability to upgrade the equipment, sometimes even during the lease term.
The cost of an operating lease is typically lower than that of a finance lease because it’s based on the asset’s value over a shorter period. The leasing company remains responsible for the asset’s maintenance.
Asset Refinance
Asset refinancing is divided into two main categories:
- Asset-Based Lending: In this arrangement, a business uses its assets as security for a loan. The assets become collateral, meaning the lender has the right to sell them if the business defaults on the loan. Once the loan, including fees and interest, is fully repaid, the asset is returned to the business free and clear.
- Sale and Hire Purchase Back: In this type of refinance, the business sells an asset to a finance company for a lump sum and then leases it back. This allows the business to access a large amount of cash while continuing to use the assets. At the end of the repayment period, the business may either continue renting the asset, walk away from it, or buy it back.
Contract Hire for Vehicle Asset Finance
Contract hire is a specialised form of asset finance designed for businesses that want to reduce the burden of sourcing and maintaining their vehicle fleets. With contract hire, a provider acquires and maintains the vehicles on behalf of the business, which then pays regular installments over the agreed lease term. Fleet management services may also be included in the contract, and at the end of the lease period, the provider takes responsibility for disposing of the vehicles.
How Does Asset Finance Work?
Asset finance plays a crucial role in driving the Australian economy by making it easier for businesses to acquire big-ticket items. This financing method allows businesses to benefit from the asset as they pay for it, without locking up capital in a large purchase. Additionally, the use of asset security often results in lower interest rates and fees.
To find the best asset finance solution for your business, consider working with a finance agency that partners with a variety of specialised asset finance companies. Register with an agency to explore your options and secure the most suitable financing arrangement for your business needs.
Conclusion
By leveraging asset finance, Australian businesses can strategically manage their cash flow, acquire essential assets, and unlock the value of existing ones. Whether you’re looking to expand your operations or simply manage your financial commitments more effectively, asset finance offers a flexible and practical solution.