With their similar names, it’s easy to confuse asset finance and asset-based lending. But these two types of financing are distinctly different, each with their own processes, advantages and drawbacks for your business.
To help you decide which is right for you, let’s look at the differences between asset finance and asset-based lending.
Asset finance
What is asset finance?
When you agree an asset finance contract, you get a loan to buy equipment, software, vehicles, buildings or other business assets. The assets being financed act as collateral, providing security for the lender.
As with regular loans, you repay the original asset value as well as interest fees for the duration of your contract. The difference is that you have a lot more freedom to negotiate rates and terms.
Your creditworthiness plays a big role in the amount you can borrow, interest rates and repayment terms of your asset finance agreement.
Types of asset finance
You have different options for asset finance depending on whether you want to own the asset or use it for a limited period.
Common types of asset finance include:
- Hire purchase: You own the asset at the end of your hire purchase term
- Finance lease: The lender leases assets to you for a fixed period
- Operating lease: A short-term leasing agreement in which the ownership rights remain with the lender
- Sale and leaseback: You sell your existing assets to a finance company and lease them back to release their capital
Why choose asset finance?
- Acquire necessary assets: Asset finance is a safe and predictable way to get the assets you need to run or grow your business
- Maintain working capital: Paying for expensive assets over time rather than in one lump sum lets you hold onto working capital for other uses
- Improve cash flow: Spreading the cost of assets over time in small monthly payments, often at a fixed interest rate, makes it easier for you to manage your cash flow
- No additional collateral: Since the loan is secured against the asset being purchased, you don’t need to put your existing assets at risk of seizure
Possible drawbacks of asset finance
- Long-term agreement: Payment terms are often more than a year, meaning you need to account for regular outgoings over a longer period of time
- Higher overall costs: Interest rates mean you end up paying more than the market value of the assets you’re funding, though this can be offset by an increase in profits
- Potential seizure: If you default on your loan payments, the lender may seize the assets to cover your debt. While this can harm your performance, it also protects you against bankruptcy
Asset-based lending
What is asset-based lending?
Asset-based lending is a special type of asset finance.
Rather than securing the loan against the asset being financed, you put up existing assets as collateral. These can include liquid and illiquid assets from your balance sheet, such as building, equipment and unpaid invoices (also known as account receivables).
Unlike asset finance, asset-based lenders are more concerned about the value of the assets offered as collateral than your creditworthiness.
Asset-based lending is most suitable for small and growing middle-market businesses with an established financial history. But it’s also available to distressed companies that can’t qualify for a bank loan.
Types of asset-based lending
The different types of asset-based lending generally depend on the type of asset you want to offer as collateral.
They include:
- Equipment financing: You secure the loan against valuable equipment or machinery
- Inventory financing: The loan is secured based on the value of inventory you hold
- Accounts receivable financing: You borrow against outstanding invoices or receivables
- Invoice financing: You sell discounted accounts receivable to a third party in exchange for liquid cash
Why choose asset-based lending?
- Fuel business growth: Asset-based lending is a quick way to generate the funds you need to grow your business, enter new markets or launch new products and services
- Stabilise cash flow: Releasing the value of your assets helps you bridge gaps in cash flow and continue your business operations uninterrupted
- Restructure debt: You’re able to consolidate and refinance existing debts to reduce your interest rates
- Easy qualification: Since asset-based lending places greater emphasis on the value of your existing assets, the qualification requirements are much easier to meet
Potential drawbacks of asset-based lending
- Liability: If you default on your loan, your business is held liable, which can put you at risk of bankruptcy
- Greater risk: If your agreement involves perishable or flammable assets, you put yourself at greater risk
- Not all assets qualify: Lenders will only accepts high-value assets with a low depreciation rate or high appreciation rate, and that can be easily sold for cash
Should I choose asset finance or asset-based lending?
Which financing option you choose should depend on whether you need to acquire new assets or generate working capital.
Asset finance lets you enhance your business with valuable assets and spread the cost over time. This makes it ideal when you’re lacking the equipment or facilities you need to grow your business.
Asset-based lending, on the other hand, gives you a quick injection of liquid cash by offering your existing assets as security against your loan. This gives you the funds you need to run your business or invest in growth.
Discover your perfect financing option with Kane Finance Services
Whether your business would benefit most from asset finance or asset-based lending, Kane Financial Services can match you with excellent rates and terms.
As an independent asset finance broker with over 35 years’ experience, we support businesses of all sizes throughout Northern Ireland and the UK. Through us, you can even find deals exclusive to the broker community that high street lenders simply can’t match.
Contact us today to discuss the right financing option for your business, or apply online to see the deals available to you.