SME Asset Finance

Asset financing has become an increasingly popular way to raise funding for small and medium businesses that use equipment and specialized tools to do business.

This type of SME finance is a good alternative for those companies who need to raise money for machinery, equipment, or vehicles and may not qualify for other types of funding. There are several types of asset finance and each one offers different features that may be more relevant depending on your business model. We put together this article to help you understand what asset financing is and why it may be a funding option worth pursuing.

What is Asset Finance? 

Asset financing is a type of lending that involves borrowing money specifically to fund the replacement or acquisition of an asset – usually a piece of equipment. These assets can be anything that is essential to your business, such as a van, catering equipment, printers, and machinery.

This type of lending is more secure than others since your collateral is something physical that can last several years. This offers more flexibility and means it may be a more viable funding option for SMEs with a relatively short credit history.

What are the types of Asset Finance?

The main types of asset finance are equipment leasing, asset refinancing, hire purchase, and vehicle asset finance.

Equipment leasing

Equipment leasing is an agreement where you essentially rent an item rather than purchase it outright. Through this agreement, the lender purchases the asset and then rents it out to companies for a monthly premium. Once a specific period has ended, you can decide to extend the lease, upgrade the item, or buy it outright. This type of asset finance is great for SMEs who use short term assets such as furniture or food. The monthly premiums are categorized as an operating expense and can therefore be offset against profit.

Equipment Leasing Option

Asset refinancing

Asset refinancing is a lending tool for companies that currently own equipment and want to withdraw some of the capital tied up in the asset. A lender would purchase the asset from you and lend you up to 80% of the value of the asset. You can then keep using the asset while paying off the loan and interest. This financing option is a good way to make current assets work more for you and receive a cash injection in case of emergency – however, it’s usually only available if you own your asset in full and the asset isn’t subject to another financing agreement.

Hire purchase

This type of asset finance works like a loan: you purchase the equipment and then pay off the loan over a period of time through monthly premiums. You’ll first pay a deposit, and then regular monthly payments until the loan is paid off. You will be responsible for maintenance and upkeep, and the item will come up as an asset on your balance sheet. This type of SME finance is a good option if you want to spread the cost of your asset over a period of time.

Vehicle asset finance

Also called contract hire, this type of financing is only available for companies that use vehicles. Say you are looking to expand your fleet of vans: with vehicle asset finance, you can choose to approach a contract hire provider who will source, maintain, and service the vehicles for you to use. All you need to do is pay a monthly premium over an agreed period, without ever being responsible for the vehicles yourself.

Why is it a good funding source for SMEs?

Asset financing is a good funding source for SMEs that require physical assets to sell their products and services. Physical assets and equipment can be quite expensive for companies, especially new SMEs with a low amount of resources. If your van is essential to do business, you won’t be able to get started until you find the funding. As a business owner, you might not want to use your personal money or the company emergency fund – or you simply may prefer allocating the company cash towards a different expense. That’s when this type of business finance becomes a good option.

Asset financing allows you to purchase equipment without committing too much capital. It’s also a good way to fund growth without increasing risk. Since you spread the cost across various months, you can also choose to match the transaction schedules to your company cashflow, making it easier to budget and forecast.

Every time you are purchasing equipment, it’s worth considering SME asset finance as an option to meet your business needs.

Machinery Asset

Who is eligible?

The eligibility requirements vary from provider to provider. These lenders will be authorized and regulated by the Financial Consumer Agency of Canada (FCAC), and will therefore require you to submit an application and provide business figures including your current assets, cash flow statements, and what you expect to do with the money and assets. Many will also require the company to have a history of at least 18 months and already be generating a decent profit. Asset finance loans can start from $1,000 all the way up to millions of dollars.

Startups that are less than 18 months old may struggle to get approved for financing, which is why it may be worth looking at alternative options in the meantime. The best way to receive funding for assets is to go through a specialist asset finance broker who can put you in contact with the lender that is most likely to approve your loan.

Asset financing is a great option for SMEs that have some trading history already and are looking for funding for new equipment or to replace old tools. It’s a secure way to receive a loan and can free up a lot of capital for new hires and expansion. If you are a young SME without much trading history, it may worth be considering other funding options such as SR&ED tax credit or a startup loan. We hope you’ve enjoyed the article and encourage you to share it with anyone who may find it useful!

Alex Kepka

Alex is a tech-focused funding expert, helping innovative companies grow through innovative funding through her work at Fundsquire. She also has a background in journalism, having written for outlets like Vice and many others in the past on topics ranging from philosophy to economics.