Small business owners are increasingly looking at alternative solutions for financing during COVID times. Is business asset finance a viable option?
In a rare turn for 2020, the news lately has been looking up. Fears of a new strain of COVID-19 in South Australia that led to a severe lockdown turned out to be unfounded after just a couple of days. The recession turned out to be brief, if severe, and the economy is slowly recovering. Even the latest unemployment statistics are far better than many expected.
All of this is in addition to the news that multiple pharmaceutical companies are gearing up to provide vaccinations that have proven 95% effective. Coronavirus might stay the biggest story of 2020, with 2021 becoming a story of successful rebuilding.
However, all of this good news is relative. Regardless of whether we ever see another case of COVID-19 in Australia, it has had a tremendous impact on businesses and individuals. Thousands of small businesses have been forced to shut down permanently, and many individuals who are back at work are struggling to make up for the loss of income over the last few months. The Australian government did a better job than many others at providing timely stimulus payments, but those grants could only go so far.
For this reason, many small business owners are looking for ways to finance their recovery. Loans secured by the government have helped, but with the economy still struggling, and industries like international tourism not yet able to reopen, small businesses have a long way to go.
One of the potential financing routes for small business owners is business asset finance. Let’s take a look at what business asset finance is and who it can help.
Business asset finance refers to any loan that a business takes out using an asset as collateral. This is the most common type of financing used when buying assets. The asset you are purchasing serves as its own security.
Asset financing is available for assets that require a significant investment, such as heavy machinery, mining equipment, farming equipment, company vehicles, office buildings, IT equipment, and more.
Business asset finance is not limited, however, to the purchase of assets. If you already own an asset, you can get financing using that asset as collateral. If you are taking this route, you need to be certain you will be able to make payments, as defaulting can lead to the loss of that asset.
Asset finance is being used by a number of Australian businesses during the COVID crisis. Here is why.
Getting a loan in a time of crisis usually requires treading some tricky ground. You may not be able to prove your ability to pay off your loan, considering that you have experienced some incredibly lean months. At best, with an unsecured loan, you will get high interest rates and restrictive terms.
With business asset financing, however, you have the asset you are purchasing as collateral. An asset serves as ideal security, as the bank or lender knows they have nothing to lose. You will get reasonable interest rates and your loan will be approved fairly quickly.
Furthermore, your monthly payments will be set for the foreseeable future, rather than changing as interest rates change. Plus, you can get certain tax benefits on a business asset loan.
Since COVID-19 has hit, businesses have struggled to come up with ways to continue getting finance. At the same time, banks and lenders have struggled to provide loans they knew borrowers might have a hard time paying back. Business asset financing is a comfortable solution in this time, as it ensures a quick payment with low rates to the borrower, and is secure in the eyes of the lender.
Your small business might be able to benefit from the best rated asset finance for SMEs. There are various ways of using business asset financing to your benefit.
The most common use of asset financing is in purchasing assets. If you work in an industry that is primarily online, business asset financing might seem like a thing of the past to you. However, in some of the biggest industries, costly assets are necessary just for the sake of basic functioning.
This is true in particular of farming and engineering businesses, which require a lot of heavy machinery that remains in good condition for a long time. The purchase of assets can be a fairly regular occurrence for businesses in these industries.
But even if you have all the assets your business will ever need, you can still benefit from business asset financing by using those assets as security. As mentioned, the risk is high if you think you might not be able to pay it back. But the benefits of this type of financing are significant.
With business asset financing, you will get a much bigger loan at a much smaller interest rate. It could be exactly what you need to keep your business afloat and the risk might therefore be worth it. After all, your business assets will not be of much use if your company has to shut its doors for good.
There are downsides to business asset financing, or requirements that might get in your way. If you are purchasing certain assets, you may have to pay a deposit of 5% to 10% upfront. Furthermore, if your asset devalues quickly, the lender might require a revaluation which damages the terms of your loan.
Finally, the asset you are purchasing might become defunct or outdated while you are still paying it off. In certain cases, you will be able to trade it in for newer equipment, but if you no longer need the equipment, you will still have to continue paying it off for months or even years.
Business asset financing has long been a widely-used way of funding companies in need of expensive equipment and property. As such, it is effective and safe, with plenty of precedent to work with in getting to know the ins and outs.
However, since we are in unprecedented times, it is important to acknowledge that the process might not be so smooth, even as the worst parts of 2020 seem to be coming to an end.
In some ways, this might benefit you. Reliable borrowers in 2020 have been few and far between, and the government has had to step in to secure loans that would never have been approved at other times. Banks are looking to provide loans to promising businesses to make up for the shortfall. They may well give you an even lower interest rate than at most other times.
This is also a reason to shop around for the right loan. If you get a better quote from one bank, ask another if they will beat it.
On the other hand, you need to be particularly careful in what you ask for. Financing an expensive asset right now might seem like a reasonable idea. But as we have learned this year, nothing is certain. Even with Australia’s success in fighting COVID-19, along with the race towards a reliable vaccine, it is hard to say how 2021 will turn out.
Businesses that rely on international tourism or business travel are still going to struggle for a while. Even if you are not in these industries, you will have a more difficult time selling your product to a population with higher unemployment and less money to spend.
Usually, the most successful businesses are those that predict trends. In 2020, the businesses that have survived are those that have been able to adapt. Trying to stay ahead of the times right now is a very risky strategy. When taking out a loan, try not to base your repayment plan on what you assume will happen if things continue to pick up.
We are getting more good news than we have throughout most of 2020. If you're trying to get your small business back to where it was pre-COVID, this is a good time to start. A number of business loans are available, and asset financing is one of the most reliable ways to go.
Make sure you are in a position to pay off any loans, and you can start 2021 with renewed optimism and potential.