What is Asset Financing?
Asset finance is a unique type of financing option available to businesses; one that can allow them to forgo the need to pay a deposit upfront when applying for a loan, in favour of using their own assets and valuable property as collateral should they be unable to meet their repayments. Most lenders will dictate a set of terms to help them to ensure that they receive their cash investment back in full, with interest to provide them with a profit margin.
If a company wanted to borrow $20,000 for example, the lender may request a deposit of 10% (or $2,000). Some businesses may want to avoid these costs, or they might not be able to afford them, so this is where asset financing comes into the fray. By calculating the value of possessions and items belonging to a business, a lender will be able to repossess these items should the repayment terms not be met.
What happens if the payments are made?
If payments are made, then the company will theoretically be purchasing the cost of their own assets back from the lender, in the way explained in the example below.
When $2,000 is required in the form of a deposit, it will be the responsibility of the borrower to cater to these costs. If a lender accepts assets as a form of assurance, then $2,000 will be calculated and used to cover the cost of the deposit. These assets can still be used by the business, but if anything goes wrong with payments, then the lender will have them repossessed and the company will lose control of them.
The outstanding $18,000 (of a $20,000 loan) will need to be repaid and then at the end of the repayment schedule, the final $2,000 to cover the cost of the deposit will also be required. As a result, these valuable possessions should be considered leverage that the lender will hold over the borrower, but as long as payments are made when required, no action will be taken and the company will still remain in possession of their goods.