Key Takeaways
- Asset based loans in Australia are loans secured by any tangible property like real estate, vehicles, machinery and any other goods of value.
- This type of financing suits businesses with assets of significant value as well as businesses that experience high capital demands and seasonal fluctuations.
- Lenders will evaluate your property and will lend you a percentage of its value. You can use this amount for any business purpose.
- Some types of asset-based lending include invoice finance, equipment finance, finance lease, hire purchase, and more.
- The type of asset, LVR, economic conditions, and the lender's risk assessment can all affect the rates for asset-based loans.
- It's crucial to assess your assets, understand the costs, go through your options, and seek professional help before applying.
Asset based loans are a popular financing option for Australian businesses looking to secure capital. This type of financing offers flexibility, especially for those that have valuable assets that they’re willing to use as security. With this guide, we will explore asset based financing— what they are, how they work, the different types available, and the factors influencing asset based loans rates.
What is Asset Based Financing?
Asset based financing is a loan or line of credit that is secured by assets. These assets can include accounts receivable, inventory, equipment, or real estate. In Australia, asset based loans are a popular option for businesses that require working capital or those looking to expand their businesses.
What’s Considered an Asset?
In the context of asset based loans, an asset is any tangible property owned that can be used to secure financing. Lenders assess the value and liquidity of these assets to determine how much they are willing to lend. Here are some common types of business assets that can be considered for asset based loans:
- Accounts Receivable: These are the outstanding invoices or money owed to the business by customers for products or services provided. Accounts receivable are often used as security because they are expected to be converted into cash once the customers pay.
- Inventory: This includes raw materials, work-in-progress, and finished goods that a business holds for sale or use in production. Inventory can be used as security, especially in retail, manufacturing, or wholesale businesses.
- Equipment: Machinery, plant equipment, computers, and other equipment used in business operations can be pledged as security. Equipment is a common asset used in asset based lending.
- Real Estate: Commercial real estate, such as office buildings, warehouses, or factories owned by the business, can serve as security for larger loans. Real estate is typically considered a high-value asset and may allow for more substantial borrowing amounts.
- Vehicles: Company-owned vehicles, including cars, trucks, freight vehicles, and delivery vans, can also be used as security in an asset based loan.
Considerations for Asset Valuation:
Lenders will assess the value of your property through different criteria, such as:
- Liquidity / How easily it can be sold or converted into cash
- How fast it depreciates or how much it has already depreciated
- The director’s clear ownership of the asset, free from liens or claims
Why Choose Asset Based Financing?
The main advantage of asset based lending is that it allows businesses to leverage their existing assets to gain access to funding. This can be beneficial for companies experiencing seasonal fluctuations or those in industries with high capital requirements, such as manufacturing, wholesale, or retail. Additionally, this type of financing is suited for businesses with asset-rich balance sheets, or those that have significantly more assets relative to their liabilities.
How Asset Based Lending Works
First, the lender evaluates the property. The loan amount is typically a percentage of the asset’s value. For example, a lender might offer 85% of the value of a company’s accounts receivable. Once the loan is approved, the borrower can use the funds for various business needs.
Asset based commercial lending also allows business owners to purchase assets without paying the whole amount upfront, spreading the cost over time.
Types of Asset Based Loans in Australia
Understanding the different types of asset based loans available in Australia is crucial for businesses considering this financing option. Here are the most common types:
1. Invoice or Accounts Receivable Financing
- What it is: Accounts receivable financing allows businesses to borrow money against their outstanding invoices. This type of financing is often used by companies with long payment cycles, helping them to manage cash flow more effectively.
- How it works: The lender advances a percentage of the value of the accounts receivable, typically around 85%. As the invoices are paid by customers, the lender takes their fee and returns the balance to the borrower.
2. Equipment Financing
- What it is: Equipment financing allows businesses to purchase machinery or equipment without paying the full amount upfront. The asset serves as security. This type of asset based loan is ideal for companies that rely heavily on expensive equipment for their operations.
- How it works: The business takes ownership of the equipment at the time of purchase. The borrower can continue using the equipment while repaying the loan, and ownership is retained once the loan is fully repaid.
3. Finance Lease
- What it is: A finance lease is a type of asset-based financing where the lender owns the asset. The borrower leases the said asset from the lender for most of its useful life.
- How it works: The lessee (business) makes regular payments to the lessor (lender) over the lease term. At the end of the lease, the business may have the option to purchase the asset.
4. Operating Lease
- What it is: An operating lease is a lease agreement where the business rents an asset for a period shorter than its useful life. Unlike a finance lease, the asset does not transfer ownership to the lessee.
- How it works: The business uses the asset for a specific period and returns it to the lessor at the end of the lease term. Operating leases are often used for assets that are frequently updated or replaced, such as office equipment or technology.
5. Hire Purchase
- What it is: Hire purchase is a form of asset-based financing where a business buys an asset over time by making regular payments. Ownership of the asset is transferred to the business once all payments are completed.
- How it works: The business takes immediate possession of the asset but pays for it in instalments over an agreed period. Once the final payment is made, ownership is fully transferred to the business.
6. Real Estate Asset-Based Loans
- What it is: This type of financing uses commercial real estate as security. It is often used for large-scale investments, such as purchasing new properties or expanding existing facilities.
- How it works: The lender offers a loan based on a percentage of the property’s market value. These loans typically have longer terms and lower interest rates compared to other asset based loans.
7. Purchase Order Financing
- What it is: Purchase order financing is designed for businesses that need funds to fulfil large orders. It allows companies to finance the production or purchase of goods that have already been ordered by customers.
- How it works: The lender advances funds based on the value of the purchase order, allowing the business to produce or acquire the goods. Once the order is fulfilled and paid for by the customer, the loan is repaid.
8. Second Mortgage
- What it is: A second mortgage is a type of asset-based loan where a business borrows against the equity in a property that already has an existing mortgage. This provides an additional source of funds by leveraging the same property as security.
- How it works: The business takes out a second loan, which is secured by the same property as the first mortgage. The second mortgage is subordinate to the first, meaning the primary lender has priority in case of default. This loan can be used for various purposes, such as expansion or working capital.
Advantages and Disadvantages of Asset-Based Loans
Advantages:
Access to Capital
Asset based loans provide businesses with access to funding that can be used for working capital and business expansion.
Ability to Purchase Assets Without Paying Upfront
Asset based finance allows businesses to purchase new or used equipment or commercial real estate without having to pay upfront.
Potentially Lower Interest Rates
Because the loan is secured by assets, lenders often offer lower interest rates compared to unsecured loans.
Disadvantages:
Valuation Costs
The process of valuing assets for security can be costly and time-consuming.
Borrowing Limits
The amount a business can borrow is limited by the value of its assets, which may not be sufficient for larger financial needs.
Restricted Use of Asset
An asset used as security is tied down, meaning the business owner cannot sell or refinance it until the loan is repaid in full.
Asset-Based Loans Rates in Australia
One of the most critical factors for businesses considering asset based loans in Australia is understanding the rates. Interest rates on asset based loans vary depending on several factors:
- Type of Asset: Different types of security carry different levels of risk, which influences the interest rate. For example, loans secured by real estate generally have lower rates compared to those secured by inventory or accounts receivable.
- Loan-to-Value Ratio (LVR): Higher LVR ratios, where the loan amount is a larger percentage of the asset’s value, often come with higher interest rates.
- Economic Conditions: Broader economic conditions, including the current cash rate set by the RBA, also impact asset based loans rates.
- Lender’s Risk Assessment: Each lender will assess risk differently, leading to variations in interest rates. This assessment includes the liquidity of the assets, the borrower’s credit history, and the industry in which the business operates.
What Australian Businesses Should Consider
When considering asset based loans in Australia, businesses should keep the following in mind:
- Assess Your Assets: Before approaching a lender, it’s important to have a clear understanding of the value and liquidity of your assets.
- Understand the Costs: In addition to interest rates, be aware of any additional fees, such as valuation fees, legal costs, and administrative charges.
- Compare Lenders: Not all lenders are the same. Shop around and compare rates, terms, and conditions from multiple lenders to find the best fit for your business.
- Seek Professional Advice: Asset based financing can be complex. Consulting with a lending expert can provide valuable insights and help you make an informed decision.
In Summary
Asset based loans in Australia offer financing for businesses of all sizes provided that they have assets to use as security. By leveraging properties, companies can secure the capital they need to grow, manage cash flow, and invest in new opportunities. However, it’s essential to understand the types of asset based loans available, the factors influencing asset based loans rates, and the potential risks involved.
Leverage Your Assets to Get the Financing You Need
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