Asset Finance vs Bank Loan

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When a business is looking to acquire equipment and assets, there are typically two primary options: asset finance vs bank loan.

Both options have advantages and disadvantages, and it’s essential to understand their differences to make an informed decision. For example, asset finance is an excellent option to preserve working capital and maintain flexibility, while traditional bank loans are best for companies with a good credit rating and looking for a relatively low-interest rate.

we’ll explore the key differences between asset finance vs bank loans and provide insights into why someone might choose one option.

The Key Differences

With asset finance, the lender secures the loan against the asset, whereas a bank loan is based on your business’s creditworthiness.

For that reason, with asset finance, the finance lender owns the asset until you fully pay the finance. However, you can purchase and own the asset upfront with a bank loan.

Asset Finance

Asset finance, also known as equipment financing or leasing, is a way for your businesses to acquire equipment and assets without paying the total purchase price upfront. Instead, you make regular payments over a set period, with the option to own the asset at the end of the agreement. 

With asset finance, the assets themselves act as collateral for the loan. If you default on the loan, the lender can repossess the asset to recoup their losses. Asset finance is typically easier to obtain than traditional bank loans, as the purchased assets act as security.

One of the most significant advantages of asset finance is that it allows businesses to acquire the equipment and assets they need to grow and succeed while preserving working capital and maintaining flexibility. This is because the payments are usually lower than if you were to buy the asset outright. Additionally, you can write the assets off against taxes.

There are a variety of different types of asset finance options available.

Advantages: 

  1. Easier to obtain: Asset finance is typically easier to get than traditional bank loans, as the purchased assets act as collateral for the loan.
  2. Fast processing: Asset finance applications can often be processed quickly, allowing you to obtain financing promptly.
  3. Preserves cash flow: With asset finance, you can spread the cost of acquiring assets over time, maintaining your cash flow for other expenses.

Disadvantages:

  1. Higher interest rates: Asset finance can come with higher interest rates than bank loans, making it a more expensive option in the long run.
  2. Asset depreciation: Depending on the assets being financed, there is a risk that they could depreciate over time, leaving you with an asset worth less than the amount you owe.
  3. Limited flexibility: Asset finance is typically tied to specific assets, meaning you may not have the flexibility to switch to a different asset if your needs change.

Bank Loan

On the other hand, traditional bank loans involve borrowing a lump sum from a bank, which your business uses to purchase the equipment or assets outright. These loans typically have a fixed interest rate and repayment term, and you are responsible for repaying the loan, plus interest, over time.

One of the most significant advantages of a traditional bank loan is that they offer a relatively low-interest rate compared to other types of financing. Additionally, a business with a good credit rating can often secure a lower interest rate than it would with different kinds of financing. You can use a company like Experian to check your business credit score.

Bank loans can be secured or unsecured, with secured loans requiring collateral such as property, equipment, or other assets.

However, traditional bank loans can also have some disadvantages. For example, they may require a large down payment, which can be a significant obstacle for businesses with limited cash flow. Additionally, traditional bank loans can be less flexible than asset finance, as you may be required to provide collateral or a personal guarantee.

Advantages: 

  1. Lower Interest Rates: Bank loans typically offer lower interest rates than other forms of financing.
  2. Flexible Terms: Banks offer a range of loan terms and repayment options, allowing you to choose a plan that suits your specific needs.
  3. Established Relationships: For businesses with an existing relationship with a bank, obtaining a loan can be relatively quick and straightforward.

Disadvantages: 

  1. Collateral Requirements: Many banks require collateral to secure loans, which can be difficult for businesses that don’t have significant assets.
  2. Stringent Requirements: Banks have strict lending requirements, making it difficult for some businesses to qualify for loans.
  3. Longer Application Process: Obtaining a bank loan can be time-consuming, as banks require extensive documentation and a thorough credit check.

Choosing Between Asset Finance and Bank Loans

So, how do you decide which option is right for your business? There are several factors to consider, including:

  1. The Assets You Need: If you want specific assets such as machinery, equipment, or vehicles, asset finance may be the best option for you.
  2. Your Creditworthiness: If you have a strong credit history and an existing relationship with a bank, a bank loan may be a more attractive option for you.
  3. Your Cash Flow Needs: If preserving cash flow is a top priority, asset finance may be a better choice, as it allows you to spread the cost of acquiring assets over time.
  4. Your Long-Term Financial Goals: Consider your long-term financial goals and how each financing option aligns with those goals. For example, a bank loan may be better if you want to build credit and establish a relationship with a bank.

Ultimately, the choice between the two will depend on the specific needs and circumstances of your business.

Take advantage of the benefits of using a car finance broker, contact us or even use our free online asset finance calculator to find out how much you could borrow.

info@dorsiafinance.co.uk | 01522 420 420

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