Rapidly growing businesses often need additional equipment for expansion, yet the increased income won’t come until after the assets are owned. Purchasing new equipment is a cost that many small business owners don’t anticipate in the first few years, and these costs can put a drain on your cash flow. This article will help you get an understanding as to whether asset finance or equipment finance will be able to help you.
Let’s start by quickly explaining how a traditional equipment / asset finance product works.
An asset finance (or equipment finance) lender will lend you money to purchase the equipment you need. That lender will take security on the equipment you buy so that should you not repay the loan, they can take the equipment back and sell it to make up for the loss.
That model means that anything that will make the asset more difficult to resell reduces the probability they will lend to you in the first place.
So, what considerations you should you think about?
New VS second hand equipment
Let’s look at a traditional lender options. We’ve checked out what one of the big four banks offer financing for on their website. No surprises to see they are strong in the following areas:
- New equipment
- New vehicles
- Professional and industrial equipment
However, ticking these boxes doesn’t make it a done deal. If you’re looking to purchase second hand, the criteria for approval becomes a little murkier. Unfortunately for most major items, these options tend to be at the more affordable end of the spectrum. If you’re after finance then bargain hunting and traditional lending don’t go hand in hand.
Traditional equipment VS atypical and specialised equipment
Not all equipment fits into the category of traditional lender financing. Most businesses need all the above at some point, but invariably whatever industry you are in, there will be specialist equipment needs that have to be financed – and specialist equipment doesn’t normally come cheap.
Take a look at your business or industry. What type of equipment do you have that is not ‘traditional’? Aircraft, marine vessels, or mining equipment are not within the boundaries of traditional lenders.
This may not apply to you but what about your computing or telecommunications needs? Most lenders will only include notebooks or desktop computers within their framework.
Likewise, telecommunications may only extend to mobile phones. Your typical lender may not want to cover for your cable data expansion or the additional servers you want to carry.
Known brands VS unrecognised brands
Most financial institutions need to have rules in place to ensure the risks they take are within set parameters, which will include the brands they are comfortable to secure their loans against.
If for some reason, your business or industry uses brands that are unknown to those institutions, then you may be out of luck.
Store purchase VS private seller
When buying equipment from a store, there is a layer of security with guarantees on the products, and an expectation it is in good working condition.
No such guarantees exist when purchasing goods from a private seller meaning an asset finance lender will not be comfortable securing the loan against that piece of equipment.
Standard VS customised equipment
Is your equipment manufactured to your specifications? Again, traditional lenders are reluctant to finance this. Their preference is for equipment that has widespread appeal and the maximum resale value should you default on your payments.
Already owned equipment VS need to buy
Traditional finance will cover for new equipment purchases but will often draw a line at financing the equipment you already own, even if it’s relatively new. You will also find yourself in a chicken and egg situation with your business growth.
Many lenders won’t consider financial projections only historical results when assessing your ability to fund the asset, yet the equipment is usually being purchased to generate more revenue that can help self-finance the growth – a catch 22 that can be frustrating.
If your purchases are eligible for asset finance, then the good news is that the total cost of the loan you’ll get will be more competitive than any other alternatives.
Bigstone can help by providing funding for the assets you need in a simple and competitive way that best suits your requirements. Talk to us today about your business financing needs and how we can tailor a loan that takes your unique asset requirements into consideration.