How Much Can You Borrow with Asset Finance?
Asset finance is a popular funding solution for businesses that require new equipment but don't have the cash flow to purchase it outright. Whether it's for a new fleet of vehicles or upgraded machinery, asset finance allows businesses to spread the cost over a fixed term.
In addition to purchasing new assets, you can also release equity in your existing assets using asset refinance.
But one question that's often asked is how much can you borrow with asset finance?
What is the maximum amount you can borrow with asset finance?
The maximum amount you can borrow with asset finance depends on several factors, such as the type of asset you're financing, your business's creditworthiness, and the lender you apply with.
Generally, lenders will offer finance for up to 100% of the asset's value for new purchases. With asset refinancing, you could be eligible for up to 90% of the current market value of the asset. However, some assets will require a deposit from you.
As with all finance agreements, the maximum amount you can borrow will also depend on your credit status, profitability, financial status and current level of debt-to-income ratio (amongst other things).
Factors that affect the amount you can borrow?
Several factors can impact the amount of asset finance you can borrow.
Firstly, the market value of the asset will determine the upper limit on how much you can borrow. If you are purchasing an asset with an over-inflated sales price then lenders will not fund the full amount, they will always assess the current market value of an asset.
Secondly, your business's creditworthiness will also be a factor. Lenders will look at your business's credit history, financial statements, and profitability to determine your creditworthiness.
If you have a good credit history and financial status, you may be able to borrow up the maximum limits of 100% for new assets and up to 90% for asset refinance.
Finally, the lender you apply with will also be a factor. All lenders will have their own set criteria and lending amounts based on applicant profiles and some will lend more than others.
This is because many lenders specialise in specific industries and may be more willing to lend to businesses in industries they have the specialist knowledge or experience in.
Types of assets that can be financed?
Asset finance can be used to finance a wide range of assets, including vehicles, machinery, and equipment.
Commercial vehicles are a popular asset for financing, particularly for businesses that require fleets of vehicles.
Machinery is also commonly financed, particularly by manufacturing and construction businesses.
Equipment, such as computers and software, can also be financed, making it a useful option for businesses that require regular upgrades. Some lenders will also offer a loan rather than a HP or Finance Lease for software, mainly because software is not a tangible asset.
How to apply for asset finance?
Applying for asset finance should be straightforward process. Firstly, you'll need to find a lender that specialises in the type of finance you require.
If you are struggling to find the right lender for your requirements, you may want to use a finance broker who knows the market and has the right lenders on their panel.
Once you've found a lender or broker, you'll need to provide them with information about the asset you wish to finance/refinance, your business's financial statements, and other relevant information such as directors details, personal net worth and ID. You will also need to advise the lender of the supplier.
The lender will then assess your application carrying out valuations of the asset, affordability assessments and credit checks and if approved, provide you with an offer.
If you accept the offer, you'll need to sign an agreement and make payments according to the agreed-upon terms.
Benefits of asset finance over traditional bank loans
Asset finance has several benefits over traditional business loans.
Firstly, asset finance is often easier to obtain than a general business loan, particularly for businesses with limited credit history or cash flow, as the asset is being used as security for the loan, which in turn reduces the risk to the lender in comparison to unsecured lending.
Secondly, asset finance allows businesses to spread the cost of purchases over a fixed term, making it a more manageable option for businesses.
Thirdly, asset finance is often more flexible than traditional business loans, allowing businesses to tailor their finance to their specific needs. For example, with asset finance the lender may let you make seasonal payments or make quarterly or bi-annual repayments.
Risks associated with asset finance?
Like any finance option, asset finance carries some risks.
Firstly, if you default on your payments, the lender may repossess the asset. This can be particularly problematic if the asset is essential to your business operations.
Secondly, asset finance is based on the current market value of the asset. If you have been quoted inflated prices, or when refinancing the asset is not worth as much as you thought, then you are unlikely to be approved for the amounts you require.
Alternatives to asset finance?
If asset finance isn't the right option for your business, there are alternatives to consider.
Firstly, you could explore unsecured business loans, although these can be harder to obtain than asset finance, they are not secured on any of your assets, offer flexible terms and borrowing amounts are not restricted by an assets value.
Secondly, you could consider leasing the asset, which allows you to use the asset for a fixed term without owning it. Some leases will allow you to return the asset at the end of the lease, while others will offer an end of lease ownership option where you pay a “balloon” or final payment at the end of the lease. Leasing is usually specific to wheeled assets but not always.
This balloon payment will be calculated based the value of the asset at the end of the term less the amount you have paid during the lease agreement.
Finally, if you are unable to obtain an unsecured loan, you may be eligible for invoice finance or other forms of secured lending such as a loan with a charge on a property. The loan can then be used to purchase assets or other legitimate business purposes.
Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.