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.
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.
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.
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.
There are six main types of asset finance:
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.
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.
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.
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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.
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.
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.
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 start-up, 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.
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 Canadian 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.
Cash in hand to help you manage everyday business expenses
Helps you manage slow payers
Frees up funds for growth
Reduces stress on cash flow
Funds to help you increase your capacity, and fulfil new orders
Helps you seek new contracts
Settles suppliers’ bills promptly
Extends your buyers’ payment terms
Swift payment for your suppliers so you can take on larger orders
Helps finance large orders ‘pre-delivery’
Lets you focus on fulfilment
Helps to build your reputation
Different loan types to suit all stages of business growth
Enables you invest in growth and expansion
Boosts working capital
Helps you manage cash flow or debt
A financial cushion to protect your day-to-day operations
Keeps continuity of operations
Avoids ‘declined’ payments
Offers extra peace of mind
Strategic borrowing which keeps your assets safe
Lets you borrow without risking assets
Gives you fast access to cash
Can be used for any purpose