Asset Finance vs. Small Business Funding: How to Choose 

Asset Finance vs. Small Business Funding: How to Choose 

When it comes to growing your business, two funding options can make a real difference – Small Business Funding  (in the form of Business Loans and Lines of Credit) and Asset-based Funding AKA Asset or Equipment Finance. 

Both options have the potential to give your business the necessary resources to address different business funding needs. Gaining a clear understanding of these distinctions can empower your business to maintain momentum and step up to the next level.

Here are Seven Questions to Use as a Guide for Making the Right Decision:

1. Why Do You Need the Funds?

Step one is to figure out what you need those funds for. 

Are you aiming to keep things flowing smoothly during those cash-flow hiccups? Then Small Business Funding could be your next best friend. It’s ideal for covering those everyday expenses like wages, stock and your next marketing campaign, but also some assets like cars and some machinery.

Are you dreaming big and need to level up your game with larger equipment or machinery? Then Asset-based Funding is more likely the direction. Get ready to expand your production capacity like a boss. 

However, here’s the Deal: Not Every Industry and Asset gets the Green Light when it Comes to Asset Finance. It can Vary from Lender to Lender. 

Some Key Industries often Not Considered for Asset Finance include:

• Industries where equipment is being leased out to the public, for example taxi, Uber and other people moving industries, ski hire and event hire equipment
• Peripheral to manufacturing items like building materials, scaffolding and loose tools
• Non-tangible assets such as copyrights and brands
• Some second-hand assets such as gym equipment
• Tailor-made assets designed to solve a unique problem

If in doubt, ask the lender, your broker or finance professional to see if your asset is eligible for asset finance.

When Asset-based Funding is not available, you can potentially opt for Small Business Funding in the form of a small business loan or business line of credit instead.

2. When Do You Need the Funds By?

Need funds urgently? Small Business Funding is most likely your best bet. It is often faster to get access to funds compared with Asset-based Funding, where securing asset valuations can prove to be quite the lengthy process.

3. How Quickly Can You Repay the Loan?

Take a moment to compare:

1. Paying back the loan quickly in larger chunks, or 
2. Paying it back over a longer period in smaller chunks

Small Business Funding is typically a shorter-term loan with repayment periods going from a few months to a couple of years.

On the flip side, Asset Finance tends to last around several years. 

It’s best to do some maths around your business’s cash flow projections and figure out which one works best for you.

We always recommend speaking to your broker or finance professional to help you out.

4. How Fundamental is this Asset to Your Business?

Next, think about how much that asset means to the success of your business operations.

If the asset you’re considering is a game-changer for driving your business forward, lenders will likely see this as a solid pathway to you generating more profits and tightening up your operations. This means they’re more confident in you repaying the funds. In this case, Asset-based Funding could be the way to go. 

If the asset doesn’t directly contribute to your business’s performance, then Small Business Funding might be a more suitable option.

5. How Valuable are Your Assets?

How long is a piece of string? If your assets are considered ‘valuable’ by the lender, you might be able to use them as ‘security’ for ‘secured business lending’. This reduces the ‘cost of risk’. 

Wait, what?

There are typically two types of business funding strategies that lenders consider. You’ve got to remember that lenders love to get their money back one way or another. The higher the chance of that happening, the more they’re going to like you. The higher the chance the lower the ‘cost of risk’.

Let us explain:

1. Secured Business Lending usually offers lower interest rates in exchange for access to an asset (this is called ‘security’). In the unlikely case that you can’t repay your loan they will use this asset to recoup what is owed to them. 
2. Unsecured Business Lending usually charges a higher interest rate because, without that asset (or ‘security’), the lender sees the loan as being riskier to them and as having a higher ‘cost of risk’. 

Small Business Funding typically offers both options. Asset Finance only offers secured business lending with the asset acting as security.

6. How Healthy is Your Business?

Lenders are like people. They’re all different and each one has different needs. So make sure you read the small print. Let’s focus on the common needs usually seen in Asset-based versus Small Business Funding. 

To arrange Asset-based Funding, many lenders generally want to see that you’ve been in business for more than two years and have hit a certain level of turnover e.g. $75,000 or more.

If you can’t show that yet – no worries. Small Business Funding might be a better option for you. And, working with an alternative lender like Lumi makes life easier for you because the application and funding process is specially designed to be fast, flexible and straightforward by using Unsecured Small Business Funding as opposed to those tied to assets or secured deals. 

7. What Other Costs Might There Be? 

Navigating upcoming costs can be overwhelming! Other unexpected costs can sneak in there, especially when you’ve got your eye on purchasing a larger asset. Have you considered these extra costs that might creep up on you unannounced?

1. Need to pull together a deposit quickly? Well, here’s the scoop: your Asset-based Funding might not cover that part. But no worries! Small Business Funding can. 
2. Got extra installation costs you weren’t expecting? Don’t sweat it! Small Business Funding can come to the rescue and keep your business on track. Say goodbye to blowing out the budget!
3. What about shipping costs from overseas? Asset-based Funding usually only kicks in once your equipment touches Australian soil. But hey, no need to hit the panic button! Small Business Funding in the form of a small business loan or line of credit can bridge the gap during the transfer period. Smooth sailing all the way!

Don’t’ worry we’ve got your back. With questions like these in mind, you’re ready to take on the challenge. 

We could have the Perfect Recipe for your Success – a Mix of Asset-based and Small Business Funding to Bring it All Together! 

Let me go a little deeper into Small Business Funding because there are two types and either or both could create a dynamic duo for your business:

• Business Loan: Get that lump sum of cash after approval and use it to seize growth opportunities and tackle one-time expenses like a pro. Repayments are set over a fixed period, and with Lumi, you can even opt for an early pay-out after 6 months, no penalties involved. 
• Line of Credit: It’s like having a business credit card on speed dial! Get a pre-approved allowance that you can draw against whenever needed. Perfect for ongoing access to funds. And when combined with Asset-based Funding, you’ve got a great mix that can cover all those extra costs that pop up. With Lumi, you only pay interest on what you use, and you can close the facility whenever it suits you. 

So, in a Nutshell: Sometimes, the Choice Between Asset Finance and Small Business Funding is Crystal Clear. But in Other Cases, a Combo of Both Funding Options can be Your Ticket to Success.

To Help You Make the Right Decision, let’s Sum it Up with a Quick Side-By-Side Comparison of their Key Differences:

	Asset Finance	Small Business Funding (Business Loan & Line of Credit)
Purpose	Acquiring assets such as equipment, vehicles, machinery, etc. (be mindful of industry and asset exclusions)	Funding for any business purpose (including assets covered by Asset-based Funding)
Collateral	Asset being funded serves as collateral	Collateral may or may not be required, depending on the loan type (secured or unsecured)
Repayment	Typically structured as fixed monthly payments over a specific term. Typically longer terms over several years	Generally involves regular monthly or weekly repayments, but terms can vary from 1-3 years
Rates	Rates can be competitive, and the asset being funded may impact the rate	Rates vary based on factors such as creditworthiness of the business, industry and loan type (secured or unsecured)
Flexibility	Offers flexibility in terms of choosing repayment terms and the type of asset being funding	Loans may have more flexibility in terms of fund usage, payment terms and ability to repay the loan early after 6 months without penalties (in the case of Lumi business loans)
Application Process	Requires details about the asset being funded, such as its value and condition	Typically requires financial information about the business (e.g. ABN, bank statements, etc.)
Tax Benefits	Potential tax benefits such as depreciation and interest deductions may be available	Tax benefits may vary depending on the type of loan and how the funds are used
Cost of Risk	The asset being funded serves as collateral, making it a secured loan with lower risk for the lender and therefore more cost effective for the borrower	Risk is primarily borne by the lender, and collateral may or may not be required. The loan could be secured or unsecured
Eligibility	Suitable for businesses looking to acquire or upgrade specific assets	Suitable for businesses needing funds for various purposes including asset acquisition
Time in Business	Usually, two years of GST registration is required to qualify for Asset-based Funding	Businesses usually need to prove 6-12 months in operation

A quick heads-up: Terms and Conditions differ considerably from one lender to another, so it’s wise to seek advice from a financial adviser, broker or different lenders. This way, you’ll get the full scoop on all the options to figure out what suits your business best.

As we Compare Both Options, here’s a Rundown of their Major Pros and Cons for Easy Reference:

	Asset Finance	Small Business Funding (Business Loan & Line of Credit)
Pros	No need for additional collateral as the asset usually serves as collateral	Can be used for all business purposes
	Provides funding for specific assets at competitive rates	Provides flexibility in terms of repayment structure
	Preserves cash flow as the loan will cover for the purchase of the asset	Helps build business credit
	Potential tax benefits	Higher borrowing limits
	Longer repayment terms	Easy, fast application and funding process
Cons	Asset serves as collateral	Requires collateral or personal guarantee
	Limited flexibility in asset use	Rates may be higher in case of unsecured funding
	Stricter financial requirements	Potential impact on cash flow if interest rates are higher for unsecured funding
	Longer application and approval process	Usually shorter repayment terms
	Possible depreciation of asset value
	Restricted industries and assets including second hand and tailor-made assets
	Cost gaps that Asset-based Funding won’t cover such as installation costs, deposits or transportation from overseas

Remember, the pros and cons we’re talking about here are the big picture view. But the nitty-gritty details, need closer inspection, depending on the lender and your business’s financial situation. So, it’s definitely a good move to chat with your broker, financial adviser or even other lenders to get the full scope of what each funding option really means for you.

Conclusion

Here’s the bottom line – the choice between Small Business Funding and Asset-based Funding comes down to your business’s specific needs and circumstances.

Small Business Funding is usually best when it comes to tackling short-term cash flow gaps, everyday operational expenses and all kinds of business-related costs and investments – even assets like vehicles and some machinery!

On the flip side, Asset-based Funding is all about empowering businesses to get those game-changing assets for long-term growth.

To make an informed decision, consider factors like why and when you need the funds, your repayment capabilities, the asset’s value, your business’s health and the cost of risk.

Don’t forget to play it safe and consult financial experts and explore various lenders to find the best terms and conditions for you and your business. With their help, you’ll find the perfect funding match for your business success.

Looking for ways to grow your business and manage cash flow? We’ve got you covered!

Reach out to us or contact your broker, we are a partner-led business and always happy to work alongside them.

Whether your are a business owner in need of funding or a SME professional looking to partner with Lumi, give us a call on 1300 005 864 or visit our website here to find out more.