SME Lending – Asset and Equipment Finance
Asset and Equipment finance is a type of business loan that can help your clients’ SMEs grow. It allows them to purchase the equipment that is needed to conduct business. These loans are tailored towards self-employed clients, small business owners and contractors who want the resources to help their business succeed, but who may not necessarily have the capital at the moment. By taking out asset finance, SMEs can reduce the risk of owning old equipment and remain at the forefront of their industry with the latest technology.
It’s important that Business Finance Professionals understand their role in assisting clients in securing new assets or equipment. SMEs may have the option of buying the asset outright or leasing it. As a Business Finance Professional, you can assist them with this choice and where leasing is the way to go, help the SME select the right type of finance product. This will not only save them time and money but also help them reduce their risk of owning obsolete, older equipment and understand the various tax outcomes depending on the product type chosen.
There are many questions raised as part of asset and equipment financing considerations. Questions such as: -
How much income will this asset generate? – cash flow forecast
The asset value at the end of term – balloon or no balloon?
Do I have ongoing work lined up for the new asset?
How much capital do I need to retain to continue to grow my business?
Do I need staggered repayments to be in line with my cash flows? (Seasonal)
How do I use depreciation and tax to maximise my purchase?
How long will I need the equipment, and will I need to upgrade it?
Do I want to 'finance to own' or 'finance to return' the asset?
Do I need a deposit?
Can I still get finance when purchasing older assets?
Asset and equipment lending is a type of business financing that is secured by the SME’s assets. These asset-backed loans are often structured to work as revolving lines of credit. This structuring allows a SME to borrow against assets on an ongoing basis to cover expenses or make investments as needed. These loans are usually advisable whenever a SME needs working capital to keep all its normal business activities running.
The lender will use the asset the SME is offering to determine the borrowing base - how much they are able to borrow, which is usually up to 70-90% of the market value of the asset. Repayments depend on whether it is a line of credit or a standard loan facility.
As well as the basics and alternative structures available for asset-backed lending, Business Finance Professional, in working with their SME clients, should consider the following aspects: -
The Business Cycle
With the passage of time, SMEs go through various stages of their lifecycle and face many challenging situations along the way. Asset lending can be used extensively throughout different business cycle stages, including working capital needs, start-up, growth, merger and acquisition, turnaround, buyouts, refinance/restructure and insolvency. Asset and equipment lending provides an alternative to traditional bank financing and offers flexibility as a SME transitions through various stages of the business cycle.
Notably, at various stages of the cycle, a growing SME will have to upgrade or replace outdated equipment to continue to function efficiently. Having the best equipment with the latest technology can give a SME a distinct edge over its competition. However, as every SME owner, manager or CFO knows, there are many barriers to being able to procure the right assets at the right time. The main reasons for this are: -
declining capital expenditure budgets
the pace of changing technology
Asset and Equipment finance offer viable options to address these obstacles.
Cash Flow Management
Many SME owners are looking for ways to improve how they manage their cash flow and to simplify their accounting. Asset finance can be an efficient way to manage your SME clients’ cash flow by either leasing or borrowing to fund vehicles and other equipment, including the latest technology. As opposed to buying an asset outright, leasing equipment or taking out a commercial loan helps a SME retain capital within their business. Leasing provides the SME with immediate access to the asset or hardware needed to expand their business whilst giving them more flexibility and options due to the retained cash.
For a SME that doesn’t have the budget for capital expenditure, but enjoys a healthy cash flow, asset and equipment finance is a great option. Traditional bank finance products are often not suited to your SME client’s circumstances or industry. They are limited by the purpose of the loan and require borrowers to have substantial additional collateral.
The benefits of asset and equipment finance include the ability to: -
arrange for up to 100% financing of equipment (e.g., new vehicle) cost
access the latest technology and the best equipment in the market
invest capital expenditure and cash in other areas of the business
take advantage of technology upgrades and maintenance included in the deal
bundle the finance costs of the equipment and make a single monthly payment
fixed repayment rates are inflation-proof and allow for budgeting for the cost of finance
choose to lease or own the assets and equipment
finance products that help preserve working capital
access flexible funds with a quick turnaround time when needed
Areas of Comparison
There are certain important aspects to take into account in order to make an objective, measured decision when comparing asset finance options: -
Repayment schedule: Discover if the repayments that are set out in the asset finance loan are flexible and are able to meet the ebbing and flowing cash flow of your business or if you'd be better suited to a strict repayment schedule to keep you on track.
Varied minimum and maximum loan amounts: With a minimum of $20,000 for some asset finance loans, it's important to figure out just how much debt your business can handle.
Lease or own your new equipment: Some lenders provide the option to lease or own your new equipment, which is handy to look out for, as it might be better for your business to lease new equipment instead of owning it outright.
Variable rates: Variable rates are something to look out for before applying for this loan, as some rates are based on market-related rates whereas others have a set rate that you know before applying.
Fees: Application fees for these loans are dependent on whichever lender you go with.
Taxation advantages: There are several structures to consider when financing equipment. Every particular approach encompasses its set of possible taxation advantages. Therefore, you should consider asking for your accountant's advice to understand which structure best suits your requirements.
There are many different lenders that provide asset and equipment finance products across many different types of equipment and assets. Depending on requirements, the equipment that could be financed with regular fixed payments includes:
Light and heavy commercial vehicles
Plant and machinery
Yellow Goods - Earthmoving and construction equipment
Dental, medical and veterinary equipment
Fit-out – franchise, shop, restaurant, gym
In conjunction with industry experts, elevateB has developed a self-paced, online, interactive Business Finance Certification. This program will provide you with the knowledge and skills required to become a successful Business Finance Professional and work in the SME space. In addition, it provides strategies and soft skills to assist you to better market and deliver your existing and new-found client offerings.
For more information on the Business Finance Certification, click here.