To succeed, British businesses require sufficient funding. Whether firms are looking to launch, seek to expand or just need help with cashflow, having access to adequate resources is essential and finance products are available to support different needs.
Two options commonly confused are asset finance and asset-based lending. In simple terms, asset financing allows enterprises to borrow money to buy assets, and asset-based lending involves a firm borrowing money on the strength of what it owns as proof it can make repayments.
Both options assist enterprises to grow and expand, letting them increase their capabilities. With access to more funds, equipment and other assets, firms can generate higher revenues.
Here we take a deep dive into the two financial solutions to help businesses decide the option that meets their needs best.
What is asset finance?
Asset finance is a financial product that supplies funding for the acquisition of moveable, tangible assets. Instead of purchasing assets upfront with a lump sum payment, firms spread the expense over time via monthly payments. Asset finance is often selected to pay for larger purchases as its helps businesses avoid a large outlay that may impact their cash flow.
The primary focus of asset finance is to provide funding for the purchase or rental of physical assets. These include vehicles, machinery and equipment for enterprises. Companies can reap the benefit of equipment that helps them grow their income while paying for it in manageable instalments with support from their increased revenues.
An important characteristic of asset finance transactions is that the asset being purchased with the finance received act as the main security. If the business fails to make payment, the finance provider takes ownership of the asset.
Examples of asset finance include Hire Purchase (HP) and leasing. HP involves buying an asset with an enterprise paying the asset’s value in instalments plus interest over a set period. It typically involves an initial down payment, and after all repayments are made, the company owns the asset.
Another option is leasing the asset for a required time. The two most common leasing types include finance lease and operating lease. A finance lease sees the company become owner of the asset after when the lease term ends, while an operating lease ends with the lender as owner.
What is asset-based lending?
Asset-based lending is a type of finance product that allows a business to use the assets that it already owns to access funds.
The focus of asset-based lending rests on using an enterprise’s existing assets as collateral to get a loan, instead of relying solely on the businessowner’s cash flow or creditworthiness. Lenders will assess the liquidity and value of a wide range of assets like accounts receivable, inventory, expensive equipment and property to determine loan size and length of term.
In asset-based lending, the businesses assets act as security. If they fail to repay what they borrow, the lender can seize their assets and sell them to reclaim what they are owed.
There are many different types of asset-based lending. These include property financing, equipment financing and invoice financing. Property is often used to secure capital as its high value allows companies to access more funding. High-value equipment can also be offered as security, but the condition and age of the machinery impacts how much money firms receive in return. Enterprises can get earlier access to cash locked in receivables and unpaid invoices owed by their customers through invoice-based lending.
Understanding the difference between asset finance and asset-based lending
While both solutions offer firms an opportunity to grow, asset finance and asset-based lending differ greatly. Asset finance is designed to supply firms with the funds they need to purchase an asset, while asset-based lending involves businesses using the asset that they own as collateral to secure funds.
Does your business need financial support?
Whether your firm needs asset finance or asset-based lending, at AJL Finance, we can help. With two decades of industry experience, we pride ourselves on providing a transparent process that lets businesses access the money they need in a fast and stress-free fashion. Complete our online eligibility checker today to find the funds you require.
