Sometimes you have to speculate to accumulate. In order to prosper, businesses must be able to grow and evolve with the market, and this often means laying out large amounts of capital for new technology and equipment.
It’s well known that liquidity is essential for business survival. But with lending less available given the current economic climate, businesses need to consider alternative forms of securing finance for the future of their enterprise. Many are finding this in the form of asset finance.
Asset finance essentially refers to a loan secured against any fixed asset, from machinery and vehicles to IT technology and even furniture. Rather than incurring a significant initial outlay, the borrower can minimise the impact on cash flow by paying a small percentage deposit, and spreading the rest of the cost over the economic life of the asset.
What are the options?
There are two main forms of asset finance:
- Hire purchase: the lender procures the asset on the borrower’s behalf, and then recoups the cost through manageable monthly payments over an agreed period of time.
- Lease finance: the lender buys and owns the asset, and the borrower agrees to rent it for use over period of time. Some businesses prefer this model because, although they won’t ever own the equipment, there’s greater scope to update regularly, and they won’t incur the ill effects of depreciation in value.
What are the benefits?
Arranging an asset finance agreement with the bank is a quick and simple procedure, which is advantageous for time-pressured small to medium-sized business owners.
In addition, the loan is secured against the financed asset so can’t be called in at short notice, and potential tax benefits make the total cost of asset finance cheaper, with more security than traditional lending.
Is it right for my business?
Assuming that you have built a sustainable and profitable model, investing in new machinery can dramatically increase the productivity of your business.
The key is to understand whether there is a clear and valuable purpose behind your investment. For some businesses, an IT system that is five years old is fine.
Borrowers should carefully consider whether the investment really offers an opportunity to increase revenue, efficiency, and ultimately bottom line. If so, then asset finance is one of the safest and most efficient ways to do it.
This Guest Post is written by Ali Raza on behalf of http://aldermore.co.uk/. Ali has been working in the Banking Industry for several years and frequently writes about finance and SME Businesses.