Asset finance explained

Want to buy or lease hard assets for your business? Or perhaps you have assets you wish to borrow against? Asset finance might be the solution.

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Page written by Michael David. Last reviewed on October 3, 2024. Next review due April 1, 2025.

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From Vancouver to Calgary, Toronto to Montreal, all the way to St. John’s, asset finance is a fast-growing choice for Canadian small and medium-sized businesses. The reason is simple: asset finance makes it easier to acquire big-ticket items such as vehicles, buildings and equipment. Instead of paying one large sum upfront, you can spread the cost over time. Or, if you already own hard assets, you can use asset finance to turn them into liquid cash.

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What is asset finance?

Asset finance is a term used when business borrowing is tied directly to the value of a hard asset such as property, vehicles or equipment.

If you need to acquire one of these assets but don’t have the cash to pay for it outright, or would prefer to use your cash for other purposes, asset finance allows you to spread the cost over time. You make smaller, regular payments during a fixed term. Fees and interest are charged in addition to the cost of the asset. You have full use of the asset throughout the term.

Depending on the terms, you may be responsible for the repair and maintenance of the asset or that responsibility may rest with the finance company. At the end of the term, ownership of the asset may return to the lender or be transferred to you.

Alternatively, if you already own a valuable asset and wish to access its value in cash, you may be able to transfer the asset as collateral to a lender, who provides a loan based on its value. This type of loan is known as asset refinance.

How does asset finance work in Canada?

Asset finance was not very common in Canada until the 1990s. Since that time, it has become much more popular, with Ontario and Quebec accounting for more than half of the total amount financed, followed by Alberta and British Columbia. While asset finance is not yet as popular in the prairies and Atlantic Canada, its adoption is growing quickly according to the Canadian Finance & Leasing Association.

The reasons for this expansion are obvious. Take, for example, an agricultural business that wishes to acquire a large piece of machinery. Rather than saving up the money or raising it from investors, they could use an equipment lease to obtain the machinery immediately and put it to work right away. This, in turn, helps them bring in the additional revenue they need to make the lease payments.

Asset finance can help you obtain the hard assets you need to incrementally grow your business and ratchet up your cash flow. You get to benefit from the asset as you pay for it. Your capital is not locked up in a large purchase that may be depreciating in value, and since your borrowing is secured by the asset itself, you often pay less in interest and fees.

There are a wide variety of asset finance companies in Canada, and many specialize in specific industries or types of finance agreements. Join Swoop to start reviewing the best options for your needs in minutes.

What types of asset finance are there?

There are six main types of asset finance:

Hire purchase. This option allows your company to buy a new asset in instalments instead of paying a large, upfront sum. You own the vehicle or equipment once you finish making the payments. In most cases, the asset appears as a positive item on your balance sheet from the start of the agreement, but the provider owns the asset until the last instalment is paid. This means you cannot sell the asset during the term. A small fee, called the Purchase Option Fee is often required to transfer ownership of the asset to you. With hire purchase, you are responsible for the asset’s upkeep.

Finance lease. A finance lease, sometimes also known as a capital lease, is an agreement where a leasing firm buys a business asset on behalf of your company and then rents it out to you. You make monthly payments until you cover the cost of the equipment, plus interest. You can then choose to extend the rental period, return the equipment, or sell the asset to a third party on behalf of the leasing firm. In some cases, you may share in the proceeds from the sale of the asset. Note that although you may never own the asset, you are responsible for insurance and maintenance costs during the rental period.

Equipment leasing. Equipment leasing is like finance leasing except you have the option to own the equipment at the end of the contract. Over a fixed term you rent the equipment from a vendor or a leasing firm and make regular payments. The leasing firm is responsible for the maintenance of the equipment. At the end of the rental period, you can extend the lease, return the asset to the lender, upgrade the item, or buy it outright by making a balloon payment. Depending on the size of your company and its needs, you can rent everything from laptops and printers to commercial vehicles and machinery.

Because equipment lease agreements are based on the depreciation of the asset, not the full price, monthly lease payments are typically less than hire purchase.

Operating leasing. Although similar to finance leasing, an operating lease is usually used for specialized equipment that a company only wants for a limited period or that it never wants to own outright. You rent the asset over the short or medium term, making regular payments for the time it is in your possession. One of the biggest advantages of this type of lease is that you can upgrade the equipment regularly, sometimes even during the rental period.

Asset refinance. Asset refinancing falls into two categories. In the first, a company pledges its assets as security against a loan. This means the lender may sell the assets to recover their funds if you default on the loan. Once the principal, fees and interest have been repaid, the asset returns free and clear to you. Buildings, land, future contracts, unsold stock, plant, and equipment can all be used as collateral. Because the loan is secured by hard assets, costs are usually lower than they are with other types of business financing.

The second category of asset refinance is called asset-based lending, or sale and hire purchase back. In this type of agreement, you sell a hard asset to a specialist finance company for an agreed lump sum. You then lease back the asset from the finance provider, thus repaying the lump sum. This circular arrangement allows you to free up cash immediately and pay it back in small increments over time. You also get to continue using the asset during the repayment period. Once the loan is repaid, the finance company owns the asset, and you may choose to continue renting it, buy it back or walk away.

Contract hire. This is strictly for vehicles, and commonly known as vehicle asset finance. It’s a good option if you want to save time and effort sourcing and maintaining your own fleet of vehicles. With this type of asset financing, a provider finds and maintains the vehicles for the business, who then pays regular instalments over an agreed lease term. Fleet management services may be included in the contract hire costs. At the end of the leasing period, the provider assumes responsibility for the disposal of the vehicles.

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What are the advantages of using asset finance?

Pros

Low or no upfront cost to purchase big-ticket items
Spread the cost over time
Benefit from having the asset immediately
No need for extra collateral, since the asset is the collateral
Can be cheaper than other forms of business financing

Depending on the type of arrangement you have, it may also be possible to have the finance company cover maintenance expenses and/or replace the item if it becomes faulty during the rental or loan period.

What are the disadvantages of asset finance?

Cons

You might not own the asset until it is fully paid for, or never at all
If you fail to keep up the payments, the provider may repossess the asset
Financing terms are generally long – almost always more than 12 months
You may be liable for damage to the asset
There may be limits on the use of the equipment (such as annual mileage on a vehicle) with penalties for going beyond the limits

Want help getting started on asset finance? Join Swoop to check out your options in minutes.

What are examples of asset finance?

Delivery company. A local delivery company depends on its fleet of trucks to reach customers. There is an opportunity to expand into a nearby city, but it will mean adding at least six new trucks to the fleet. Through an agreement with a leasing company, the delivery company receives the trucks it needs in exchange for making monthly lease payments. The leasing company also offers fleet management services, which means it will maintain the trucks during the lease and dispose of them at the end of lease.

Engineering firm. An engineering firm uses high-value machinery that it owns free and clear. The company now wants to access some of the value in those machines to invest in expanding its market share. They pledge the equipment as collateral for a loan, which they use to grow into new territories. The company makes regular payments until the loan is paid back and ownership of the machinery is transferred back to the business.

Asset finance vs. bank loans – what’s the difference?

The main difference between asset finance and a bank loan is that asset finance always uses a hard business asset like property, machinery or vehicles to secure funding. This allows for a lot of flexibility in term of the terms and structures that are possible, including various loans, leases and rental arrangements. It often also helps keep costs down, since any lending is secured by collateral.

Banks can also offer loans that are secured by collateral, so there can be some overlap in that sense. However, bank loans may also be secured by non-business assets, such as a personal residence, or might not have any assets for collateral at all. In these cases, banks may have different lending criteria based on things like analyzing your business operations and cash flow projections.

Why is asset finance a good funding source for Canadian SMEs?

In some cases, asset finance is a good choice simply because other options are limited. For example, you may own valuable equipment on one hand and need an injection of cash on the other hand. In this situation, asset refinance might be the most direct way to turn a hard asset into liquid cash.

In other cases, it just makes sense from a cash flow point of view. Why sink valuable cash into a long-term purchase when those funds can be used elsewhere to grow your company? Asset lending and leasing options are available to help you acquire the tools you need right away and pay for them at a pace that you can handle.

Is my business eligible for asset finance?

If your business is able to meet its financial obligations, the answer is yes. Whether you are a solo entrepreneur, a partnership, a corporation or a new startup, there are asset finance solutions from a variety of lenders to fulfil every need.

Calculating the best type of asset finance, the lowest rates, and the ideal lender for your business can be very time-consuming. Join Swoop and we will do the hard work of comparing options for you.

Written by

Michael David

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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