• Business Finance

13 Frequently asked questions about Financing Business Assets

While many people are scared of debt, used correctly in a business environment, it can be highly beneficial in the short, medium and longer term. It is essential to respect debt, but without it being used constructively, businesses can easily fall behind competitors. However, there are many factors to consider when looking at business asset finance.

What is asset finance?

This is best described as the purchase of fixed assets used as security against a business loan. When pondering an application, you will also need to consider the forecast degree of depreciation.

There are various types of asset finance, such as:-

• Hire purchase
• Finance lease
• Equipment leasing
• Operating leasing
• Asset refinance
• Contract hire

Here at Crester Credit, we provide this type of finance in its most basic form. Used predominately to purchase fixed assets, which are tangible and not prone to heavy depreciation, the assets are used as security against the finance.

How does asset financing work?

Successful applicants will receive funds to buy business assets, putting them in a relatively strong position as a cash buyer. Once the asset has been acquired, it will be held as security while the loan is paid off. While the loan is being repaid, you will have full use of the asset in question.

This type of business finance is akin to a traditional loan, although secured against the business asset you are buying. These assets tend to be critical to a business and are usually acquired to immediately improve productivity, cash flow, and profits. In theory, many business finance arrangements will be self-funding due to the improvement in productivity.

 

What can you borrow for?

As this type of finance tends to relate to business activities, there is a broad scope to which it can apply. If the figures add up and there is relevant security, all options are on the table.

Some of the more common assets acquired under this type of financial arrangement include:-

• Farm machinery
• Industrial equipment
• Business vehicles
• Property

In reality, whether a traditional or specialist business, all applications will be considered if you can justify the purchase of the assets in question and cover repayments.

What does asset financing apply to?

As we touched on above, the critical factor is that the purchase should be a tangible asset with a relatively low level of depreciation.

A tangible asset can include cash, inventory, vehicles, equipment, buildings and other investments, something you can touch. Intangible assets are not considered physical assets and may consist of accounts receivable, patents and goodwill (generally related to a business acquisition).

What interest rates do you charge on business asset loans?

Our asset financing rates start from 13% and vary depending on the asset and its value.

The asset cost and the impact on business cash flow and profitability will influence the interest rate charged. However, it is essential to remember that this type of finance is used to make your business more profitable. This would not happen if we set excessive interest rates, as these would negate much of the benefits.

What happens if you default on loan payments?

In the unfortunate situation where you cannot maintain loan repayments, the asset held as security would be liquidated as a last resort. However, there are numerous other options to consider before selling the security.

We appreciate that the performance of businesses can vary, with short-term cash flow issues often leading to defaults on loan repayments. While the asset is held as security against the loan, we would seek to investigate alternative solutions such as, for example, refinancing or repayment holidays. The asset would only be sold and used to repay the outstanding loan in a worst-case scenario.

Funds left over after repayment would be returned to the business, although any shortfall would need to be covered by the client.

Can I use additional collateral from a third party?

In simple terms, the less risk associated with the business asset financing, the more favourable the terms. Consequently, using additional third-party collateral may strengthen your case for a loan.

As well as third party collateral, you may have additional business assets which you can use as security. This can be a beneficial way of maximising business assets, often referred to as “sweating the assets”, many of which may be paid up and effectively dead money. However, it is vital to be aware that all security offered against a loan will be at risk if you default on repayments.

 

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What are the benefits of equipment finance?

There are many potential benefits associated with equipment finance, such as increased profitability, enhanced cash flow and ultimately, an improved business valuation. It is essential to consider the short, medium and long-term benefits.

Successful applicants at Crester Credit will instantly experience two significant benefits. Firstly, once the loan is secured, you are effectively a cash buyer, which brings with it a relatively strong negotiating position. Secondly, the ability to repay the asset’s cost (plus interest) over a period of up to 3 years and beyond in some situations is beneficial to cash flow. Indeed, many business assets can be self-financing from day one due to improved productivity, orders and profits.

Will I need to pay a deposit?

This will depend upon the type of asset you require and the estimated depreciation rate.

Whatever the situation, if you can pay a deposit on the purchase in question, this will reduce the level of finance required. This will lead to lower interest payments in the longer term, although it may impact cash flow in the short term. These are the kind of issues we will discuss with you during the initial stages of your application.

When will I take control of the asset?

While you will have full use of the asset from day one, it will be held by the loan provider as security.

To provide finance for any business asset, we will require a degree of collateral, usually the business asset in question. While you will have unfettered use from day one, we will effectively own the asset until the loan is repaid. At this point, the security arrangement will be removed and ownership of the asset transferred to the client.

What is the maximum term for a finance loan?

Traditionally, for loans above $4000 we can extend the term to 3 years. However, depending on the asset/scenario, there may be the scope to extend the repayment period beyond three years.

While we use three years as a leading ballpark figure for any personal or business loans, everything is negotiable, and we are flexible. It may be that the full benefits of the asset will not show through immediately, and a longer repayment term is required. It is not in our best interests to pressure clients into agreeing to uncomfortable short-term repayment terms. The short, medium and long-term goal is an improvement in the business and relatively comfortable repayment terms.

Will my credit rating be taken into account when applying for finance?

As a responsible lender, we are obliged to consider the credit rating of individuals and businesses. However, this is negated to a large extent when security is provided against the loan.

We fully appreciate that businesses and individuals can struggle with their finances from time to time. However, many financial challenges will be short-lived, and we do not believe in making a difficult situation even worse. Therefore, when considering your loan application, we will look at security, projected cash flow and profitability, and plans for the future.

What is the maximum business finance loan?

We can offer up to $100,000 in equipment finance, assuming suitable security is available.

While many companies may be wary of taking out large loans, everything is relative to the value of the asset/security and the impact on the underlying business. As we touched on above, in many cases, the introduction of new business equipment can have a material effect on cash flow and profitability. This takes us back to our initial comments, the need to respect debt but also understand its value when looking to grow a business in the longer term.

Conclusion

Debt is not the enemy, and if used correctly, it can be highly beneficial for any business. Hence the growing popularity of equipment finance amongst business owners. While the depreciation of the security asset is a primary consideration, we will also take into account business cash flow going forward. In addition, we often find that many new business assets have an immediate impact and can often be self-financing from a relatively early stage. This perfectly illustrates the benefits of asset finance, but it is vital to appreciate the potential downside.

In the event that you are unable to maintain repayments, after exhausting all other options, we may need to liquidate the security to repay outstanding funds. However, we appreciate that situations can change from time to time and, where possible, we will seek to be flexible and understanding.

Our goal is to build long-term relationships with our clients, where trust and honesty are front and centre. We are here to help, not hinder your business and will do all we can, within reason, to assist.

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