Buy, lease, or borrow – take the hard work out of hard assets
Asset Finance is a fast-growing funding choice for Australian businesses. It makes it easier to buy, use and benefit from big-ticket items such as vehicles, plant, and machinery. Instead of paying one large sum upfront, spread the cost over time with smaller, regular payments.
Asset financing is based on the intrinsic value of the assets of a business. In asset financing, the loan is secured by underlying assets which function as the collateral, making the loan less risky to the lender. Not only are asset lenders more willing to provide funds, but they will often also do so at more favorable terms compared to traditional lenders.
Asset (re)financing can be done on new assets and on assets that a business currently owns. Instead of spending funds on a capital-intensive asset, such as a building or a piece of equipment, a business may have it financed by a specialized lender. In return for regular payments, a business enjoy the asset for a defined period. The chief benefit is that funds can still be used for other purposes.
Another feature of asset-based lenders is that they are usually specialized firms. They are experts in specific asset types and the associated processes, allowing them to operate more efficiently. For example, an operational leasing company might rent millions of cars across the globe. As a result, they possess in-depth knowledge of the used car market, benefit from economies of scale, and can insure their vehicles in bulk.
At Swoop, we have experts dedicated to getting you the best asset finance deal possible. Register now to explore your options – it’s fast and free. If you have any questions, your dedicated funding manager will be happy to talk.
What type of assets can be financed with asset-based lending?
What types of asset finance are there?
Contract hire / operational lease:
How does asset finance work in Australia?
What are the advantages of asset finance?
What is short-term asset finance?
Asset-based (re)financing vs. factoring
The risk of financing long-term assets with short-term liabilities
Can I get asset finance with bad credit?
Can a small business/startup get asset finance?
Is asset finance regulated in Australia?
An asset is an item of property from which a company derives benefits. Some assets generate benefits in the short run, such as inventory and trade receivables, while others provide benefits in the long run, such as buildings and machinery. Assets represent value and they are a key driver in your company’s profit generation cycle.
The assets that qualify for asset (re)financing by a third-party lender are enormous. Such assets include:
Equipment finance:
Transport finance:
Technology finance:
Commercial property finance:
Inventory and trade receivables financing:
Asset-based financing can take various forms. All methods are centered on lease agreements (rent agreements), purchase agreements, or refinancing of assets currently owned by a company.
Many asset-financing solutions exist, such as operational leases, hire-purchase agreements, financial leases, and sale and leaseback structures. The differences between these structures create different rights and obligations for the parties involved and is strongly recommended to talk to an experienced financial advisor to see which structure fits your situation the best.
The most common asset finance products are:
A contract hire, also known as an operational lease, is simply a rental agreement. It is a suitable solution for a company that wants to have access to new equipment without having to commit the capital upfront. The leasing company will purchase the equipment on behalf of a company which then rents it from the leaseholder over the contract term. Rental fees are usually to be paid at regular intervals and are are tax deductible expenses, reduce a company’s taxable income.
The lender is the owner of the asset and faces the resale risk. By entering into an operational lease agreement, the borrower is not exposed to the price fluctuations of the asset. For example, if a company owns a car and wishes to sell it at a later date, the sale price is an unknown. Operational leasing eliminates the uncertainty around the resale value.
Operational lease contracts can often be expanded with additional services. Depending on the type of asset, rental agreements may include insurance, coverage for accidents and breakdowns and maintenance expenses. Without specific coverage, the borrower would remain liable for damage to the equipment.
Hire purchase is very similar to a contract hire structure. It also allows a company to spread the purchase price over multiple payments instead of paying a single lump sum. The key difference is that the borrower automatically becomes the owner of the equipment once the last payment is made.
The intent to purchase the equipment affects the accounting treatment of the asset: the asset is recorded on a company’s balance sheet, and the interest and depreciation charges are tax-deductible expenses.
Financial leases also avoid the need for a business to commit a large sum upfront. The equipment will be purchased by the leasing company and rented to the borrower in return for a periodic fee. Financial leases are more flexible compared to a hire-purchase agreement because they may allow a company to return equipment early, extend a lease, or purchase the equipment.
It is an almost certainty that a business will exercise the option to buy, because financial lease contracts usually include a purchase provision for a symbolic amount, such as $1. The asset is booked on the balance sheet and the interest and depreciation charges are also tax deductible. The key difference between a financial lease and a hire-purchase agreement is that the purchase is not automatically triggered at the end of the lease contract.
A finance lease is useful when the contract term is hard to predict, or when the equipment is used intensively. Borrowers will not be charged for damage to the equipment because the damage affects the value of the asset. Borrowers are, however, exposed to an uncertainty factor: the price of the equipment when it is eventually sold.
Sale and leaseback operations allow customers to sell their existing assets to an asset lender. They are quite common for office space, industrial facilities, and transport equipment (vehicles, trucks, trailers, boats, and airplanes).
A sale and leaseback can release a lot of capital, reduce a company’s exposure to certain risks, and stabilize a borrower’s earnings and cash flows. For example, when a borrower monetizes a used car through a sale and leaseback, the borrower is no longer concerned about the changes in its value. If the book value of the asset is below its market value, a sale and leaseback can even unlock a lot of hidden value.
With the impact of vaccination programmes and a greater understanding of the treatment, spread and containment of COVID-19, the domestic and global economic outlook has improved tremendously. Asset financing has sharply rebounded since the end of last year. Australia’s business confidence has reached its highest level in seven years, translating into strong demand for asset finance from many businesses. Many businesses use asset finance to purchase new equipment, especially vehicles, construction equipment, and agricultural equipment.
There are clear reasons for the strong demand for asset finance products: Asset finance can make capital-intensive items more affordable or can unlock significant funds from assets that a company currently owns. Asset financing may be used as an effective risk management tool, allowing companies to outsource risks such as the volatile resale value. Finally, it is a competitive solution that allows a company to diversify funding sources.
The Australian government has expanded the instant asset write-off scheme in response to the impact of the COVID-19 pandemic. This allows businesses with a turnover below $5 billion to claim a tax deduction up front for the full value of their purchase.
Swoop has access to an extensive network of asset finance companies that specialize in different industries, products, and structures. By registering with us, you will be able to explore your funding options for FREE and with no further obligations.
Asset financing is a secured type of lending. If a borrower cannot meet their contractual obligations, asset lenders have recourse to the collateral. Depending on the asset financing structure, the lender holds the ownership title or other legal claims on the assets. They will most likely repossess the asset to recover their money.
Asset financing may also be done on a short-term basis (less than 12 months). When a company provides collateral against cash, it takes the form of a short-term loan. If the company rents equipment for a short period, it takes the form of a short-term lease.
The benefit of a short-term loan is that it can free up cash to fill a cash flow gap or to fund an immediate need. A short-term lease is useful when a company wishes to rent a piece of equipment for a short period, especially when that equipment may not be needed again in the future.
Although asset financing is usually done over longer periods, some asset lenders offer short-term financing. Swoop works with a network of lenders that provide both short-term and long-term asset financing solutions.
The value of the borrower’s trade receivables is a crucial aspect of receivables financing (factoring). Under a factoring agreement, a company sells trade receivables to a factoring company. The factor will advance a percentage of each invoice to the company after subtracting its service fee.
In contrast, asset-based financing is based on the borrower’s receivables and also on a much broader borrowing base. The borrowing can also compromise other assets, such as inventory and property, plant, and equipment. Thus, the amount of debt available to the borrower is much larger with asset-based financing relative to factoring.
A company’s asset-capital structure needs to match. The “matching principle” implies that a company’s long-term assets must be financed with matching long-term capital sources. If the long-term assets are financed with short-term funding, the company’s economic viability is at risk.
It is important that the maturity profile between assets and liabilities is aligned; if the useful life of an asset is five years, it must be matched with liabilities that have the same maturity profile.
The interest rate depends on several factors: finance structure, the type and quality of the underlying asset, the loan maturity profile, the size of the transaction, and the repayment risk. Since asset finance is a secured form of lending, the lender can usually offer a more competitive rate compared to a transaction that is not secured by collateral. However, interest rates do factor in repayment risk: the higher the chance that a borrower will not meet its financial obligations, the higher the interest rate will likely be.
Another pricing factor is the type and quality of the underlying asset. A high in-demand commercial property may be monetized more easily than a highly specialized piece of equipment with a limited alternative use. The popularity of the brand could also play a role. For example, Toyota’s popularity as a car brand in Australia helps these vehicles maintain their resale value much better than other makes.
The annual percentage rate (APR%) gives a good indication of the cost of lending, but is not the full story. Other aspects to consider include one-off transaction fees and alternative use for the funds of they have been loaned against a specific project. These alternative uses may include investments that supercharge a company’s growth, creating value as long as more money is generated compared to the cost of borrowing. Consider too that the actual cost of lending is lower than the advertised rate since interest expenses are tax deductible.
The likelihood of securing asset finance depends on the type of finance requested and the financial position of the company. If the request is backed by valuable assets that the company already owns, the lender’s decision is determined by the intrinsic value of that asset. Some lenders might feel comfortable enough lending solely based on the value of the collateral. Other lenders will still request the borrower to provide them with financial statements to determine repayment capacity.
Every lender is primarily concerned about whether they will be repaid on time; breaches of contract create a lot of work if it becomes necessary to repossess the asset.
Sometimes, an individual’s personal credit standing may become a decisive factor. Sole traders and partnerships need to factor in their personal credit as these business structures do not create a separate legal entity. Even in a limited company, directors’ personal guarantees may make an individual’s credit score relevant.
In short, every lender has a commercial strategy, risk tolerance levels and credit policies. As a borrower, it always pays to explore your options, especially when borrowing with less-than-perfect credit metrics.
Startups and small businesses are perceived as risky because their financial results and cash flows are volatile. A lot of startups go bankrupt in their first few years of operation. That is why traditional lenders’ appetite to lend money to startups and small companies is subdued. Sole traders, partnerships, and limited companies might all have access to asset financing while they would struggle to secure a traditional loan.
SMEs and startups might also possess high-quality assets that can be monetized. Asset financing is based on the intrinsic value of the asset and not on the company’s financials. Not only is asset financing more accessible, but it might also make more sense to avoid significant cash expenses while these funds could be deployed to grow the business instead.
Loan amounts can vary from a few thousand dollars to several millions of dollars. Several factors influence the maximum borrowing amount, such as the transaction structure, the type and quality of the underlying asset, the amount of collateral, and the borrower’s repayment capacity.
Swoop will assist you with identifying your funding options and with determining how much you can free up by monetizing assets.
Yes. The financial sector is subject to several government regulations. Traditional lenders need to comply with sound lending practices and strict requirements to manage their credit risk exposure. Recognized non-bank lenders also need to comply with prudential lending standards.
Financial institutions are supervised by the Australian Prudential Regulation Authority (APRA) while non-bank lenders are regulated by the Australian Securities & Investment Commission (ASIC). Borrowers can always raise their concerns and disputes to the Australian Financial Complaints Authority.
If you can meet your financial commitments, you qualify for asset-based financing. It does not matter whether you are a sole trader, a partnership, an SME, or a startup. Most likely there is a structure that can be customized to fit your requirements. Asset finance is an attractive, flexible source of financing. Since there are so many players, qualifying assets, and structures, the entire process might be overwhelming and extremely time-consuming. Swoop helps you get connected with specialized asset lenders. Register with us and receive a personalized price quotation in minutes. It is FREE with no further commitments. Find out where you stand, what you can borrow and get the best deals by registering with us today.
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