Starting a new business is about so much more than simply having a good idea or product, it requires capital investment, or in other words – money. Sadly, many great businesses fail to get off the ground because they just don’t have access to the funds they need to take those first vital steps. Using asset finance may be a way for new businesses to get through the first few months of starting their business, without the stress of searching for an investor.
What is asset finance?
Asset finance uses the assets owned by a business as collateral for a loan that the business can use for further investment. These assets can be tangible, such as buildings, machinery or inventory or intangible such as investments or future invoices. The only requirement is that the asset can be converted into cash if needed. The asset used as collateral can also be a new purchase that is leased or loaned to the business until the loan is paid.
Asset finance provides a more flexible way to fund the growth of your business with less risk than a traditional bank loan. If there is a failure to pay, it is just the asset that is lost and nothing more. This protects those starting the business from personal financial loss.
Asset finance for a new business
While it may seem that asset finance is aimed at established businesses with plenty of existing assets, this really isn’t the case. It is in fact, one of the best ways for a new business to buy assets even at the very beginning of their journey.
- Hire purchase: One of the most popular ways to buy an asset for a new business is via a hire purchase agreement. The lender agrees to buy the asset for the business in return for a regular fixed payment (sometimes with a larger down payment). At the end of the set time the business has paid off the asset or may be required to make one further lump sum payment to own the asset.
- Leasing: While this is set up in a similar way to the above, the business is only ever renting the asset and will not have ownership at the end of the term. Once the final payment is made towards the lease, the business can choose to set up a new agreement for an updated asset or walk away entirely. They will not own the asset. In some cases, the lease may be set up for a small part of the asset’s life (say, for one year). This is more like a hire contract and there is no ownership of the asset at any point.
- Asset refinance: While this is usually aimed at businesses that are established, it could be useful for some new businesses too. In this case the financial lender uses an existing asset as the security for the loan. Some new businesses may already have substantial assets, in particular premises, machinery, or vehicles, that could be used in this way.
The benefits of asset finance for a new business
Easier to obtain
Asset finance is more flexible and easier to get than a traditional loan. For new businesses, this is particularly important. Most traditional lenders will require at least three years of accounts and evidence of a steady income to provide loans to a business. Therefore, many business-owners are forced to take out personal loans. Asset finance removes this barrier.
Fixed payments
Cashflow for a new business is always difficult in the early months and knowing how much you will be paying for your asset finance will make budgeting much easier. The fixed payment structure of this type of loan is crucial for a new business to be able to plan their finances and future investments.
Less risk
Asset finance is one of the only types of business loan that limits the risk to the business. The loan is attached only to the asset used to secure it and this will be the only loss to the business if there is a failure to pay. In most cases this will mean that the business can carry on operating as they had before they got the loan. It is not recommended to default on these loans however, due to how it will affect the ability to secure future lending, but this is still a big bonus for a new business.
As you can see, even a new business can make a heavy investment in their future growth with asset finance, regardless of their existing asset ownership. For those just starting out, this could be the perfect way to achieve their goals much faster than they ever expected.
Get in touch with us at Funding Bay for your Asset Finance needs.
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