Asset finance is a popular form of financing for businesses that need to acquire or upgrade assets such as machinery, equipment, and vehicles. The two primary forms of asset finance are short-term and long-term finance. Short-term asset finance solutions include lease agreements, hire purchase agreements, and overdrafts.
While short-term asset finance solutions can be a quick and convenient way to acquire assets, they can also come with several problems. In this blog, we’ll discuss some drawbacks.
High-Interest Rates
Short-term asset finance solutions generally come with high-interest rates, which can significantly increase the overall cost of the finance. The high-interest rates are due to the short repayment period of the loan, which means the lender needs to earn a higher return on their investment to compensate for the risk involved.
Limited Time to Repay
Short-term asset finance solutions usually have a repayment period of one to three years, which can be challenging for some businesses. The short repayment period means that the monthly repayments will be higher than long-term finance solutions. This can put a strain on a business’s cash flow, making it difficult to manage day-to-day expenses.
Security Requirements
Short-term asset finance solutions often require security, such as a deposit or collateral, to be provided by the borrower. This can be challenging for some businesses, especially start-ups, as they may not have the necessary assets to provide as security.
No Ownership of the Asset
With lease agreements, the lender retains ownership of the asset, and the borrower only has the right to use it. This can be problematic if the borrower wants to make modifications to the asset or if they need to sell the asset before the end of the lease agreement.
Limited Flexibility
Short-term asset finance solutions generally have limited flexibility when compared to long-term finance solutions. For example, with a hire purchase agreement, the borrower is committed to purchasing the asset at the end of the agreement. This can be problematic if the borrower’s circumstances change, and they no longer require the asset.
Hidden Fees
Short-term asset finance solutions can come with hidden fees, such as early repayment fees, which can be costly for the borrower. This can make it challenging for businesses to budget accurately and can result in unexpected costs.
Limited Availability
Short-term asset finance solutions are generally only available for specific assets and industries. This can be problematic for businesses that require financing for assets that are not covered by short-term asset finance solutions.
In conclusion, while short-term asset finance solutions can be a quick and convenient way to acquire assets, they can also come with several problems. High-interest rates, limited time to repay, security requirements, no ownership of the asset, limited flexibility, hidden fees, and limited availability are some of the issues that businesses may face when using short-term asset finance solutions. It’s important for businesses to carefully consider their financing options and choose a finance solution that best suits their needs and budget. If a short-term asset finance solution is the only option, businesses should make sure they fully understand the terms and conditions of the agreement and budget accordingly.
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