The choice between Asset Finance and Traditional Bank Loans depends on various factors, including the specific needs and circumstances of the borrower. Both financing options have their pros and cons, and the suitability of each will differ based on the situation. Let’s explore the characteristics of each option to better understand which might be better for different scenarios:
Are you trying to grow your business, but scared that it’ll require more funding? Sure, we all have endless ideas at the back of our minds to grow our business into a brand. Yet, the only obstacle that seems to blur your way is the financial crisis.
If you’re getting capital, there’s no chance you can expand your operations or compete in the industry for long. In such cases, bank financing seems to be the only way out.
However, asset finance has revolutionized the field where you’ve to consult an asset finance broker to fulfill your monetary requirements. Asset financing is a relatively fresh approach that is yet to be explored.
Yet, before we delve into further details that what you should opt for, let’s see how they work.
- Asset finance is a type of financing where the borrower uses an asset (such as machinery, equipment, vehicles, or even real estate) as collateral for the loan.
- It is particularly useful for businesses that require capital to acquire or upgrade assets crucial to their operations.
- The loan amount is often directly linked to the value of the asset, and the repayment term may align with the useful life of the asset.
- Pros: Easier approval process, lower interest rates compared to unsecured loans, preserves working capital, and allows for asset acquisition without a significant upfront cost.
- Cons: The asset used as collateral is at risk if the borrower defaults on the loan, and the value of the asset may depreciate over time.
How Does Bank Financing Works?
As you must know, bank financing is a traditional method of acquiring finances when needed. It includes a lengthy application process, reviews, and approval, where the borrower must show the ability to repay the loan. The bank will evaluate the borrower’s credit history, income sources, and other assets to check affordability. Once approved, the borrower will receive funds and is liable to repay the loan over a specific period.
Fixed vs. Variable Interest: Bank loans often come with fixed interest rates, making it easier for borrowers to plan their repayments without worrying about fluctuations.
How Does Asset Financing Work?
Asset finance is the practice where businesses secure funds to purchase or lease equipment, vehicle, and other assets. The financing is often provided by a lender and the borrower, who works with an asset finance broker to negotiate the best terms. In most cases, the broker may suggest asset types and help with the application process.
- Traditional bank loans are typical loans where the borrower borrows a specific amount of money and agrees to pay it back with interest over an agreed period.
- These loans can be secured (collateral-backed) or unsecured (no collateral required).
- Pros: Can be used for various purposes (not limited to asset acquisition), flexible terms based on creditworthiness, and may offer various loan products to suit different needs.
- Cons: Typically require a more extensive application process, higher interest rates for unsecured loans, and may demand a strong credit history.
Now that you know how both processes work, it’s time to see what sets them apart.
Bank loans generally involve a more rigorous application process, requiring substantial documentation and proof of financial stability.
With traditional bank loans, you must attend to a huge pile of paperwork and wait weeks to receive approval. Since they need to scrutinize applications, thereby is more time-consuming
On the other hand, there’s also no guarantee they’ll approve your request. That’s not the case with asset financing, as they usually take a day to approve your request. As they set their requirements straight from day one, there’s nothing much left to do.
- For asset-intensive businesses needing to purchase equipment or machinery, asset finance might be more suitable as it provides a way to obtain funding without putting too much strain on working capital.
- Startups or businesses looking for general working capital might prefer traditional bank loans, especially if they have a strong credit history and don’t want to pledge assets as collateral.
- Collateral-Based: Asset finance involves obtaining funds by using assets (e.g., equipment, machinery, vehicles) as collateral. The lender may repossess the asset if the borrower defaults on payments.
- Flexible Terms: Since the loan is secured against an asset, lenders may offer more flexible terms, including lower interest rates and longer repayment periods.
- Asset Ownership: While using the asset as collateral, the borrower usually maintains ownership and use of the asset, making it a viable option for businesses needing to use equipment for operations.
- Asset Replacement: Asset finance can be particularly useful for businesses that require frequent equipment upgrades, as they can use the loan to finance new assets when needed.
- Asset Depreciation: One downside is that the value of the asset may depreciate over time, which could affect the loan’s terms and borrowing capacity in the future.
- Debt Consolidation Option
If multiple lines of credit weigh down your business, asset financing may help you consolidate those into a single loan.
What’s more impressive is that they require a lower interest rate with flexible payment options. It can also help reduce risk if something goes wrong with one or more of your accounts. As they’re considered a single loan, it clarifies your operations.
- Lower Interest Rates
Regarding interest rates, both bank and asset financing have the upper hand. Since collateral, instead of personal guarantees, secures asset finance, it possesses a lower interest rate.
In addition, there’s a good chance that you’ll enjoy extra feasibility, like flexible payment options and longer repayments.
On the contrary, some banks will offer you lower interest rates, but the catch is they’ll only accept your business if it’s flourishing.
- Flexible Use Of Funding
One of the most considerable facts about bank financing is fewer restrictions on using your funds. Whether you’re seeking startup or working capital, banks ensure the funds are used for the same purpose.
Unsecured or Secured: Traditional bank loans can be either unsecured (no collateral required) or secured (backed by collateral). Secured loans usually have lower interest rates.
In most cases, using it for your own case is not allowed. But, as long as you’re taking responsibility for the repayment, asset financing won’t create hurdles in your way.
- Increased Liquidity
If you need funds instantly, you may sell your assets and proceed without waiting for the bank to approve your loan request. Yet, you’re likely to get more options with asset financing than banking.
For instance, when you need cash instantly but don’t qualify for a bank loan, an asset finance platform can get your project off the ground without asking for much security. The idea is to make the financing deal seamless for the users, making them trust modernity.
- Transparency Matters
Some asset financiers offer less transparency than banks regarding fees and terms. It’s because quotations aren’t specifically defined in each case. It may mislead the borrower since the lender may seize the assets if the other party can’t fulfill their promise.
Creditworthiness: Banks heavily consider the borrower’s credit history and financial standing. Small businesses or individuals with less established credit may find it harder to secure a bank loan.
As for banking, there’s an authorized system where you receive multiple notifications before abstaining from the assets.
In life, we encounter multiple situations where we’re compelled to contact a financing platform. While banking has always been a priority, asset financing has been a wonderful addition to the queue. To make a well-informed decision between the two, understanding their context is crucial. In this regard, this guide has everything you must know.