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Asset finance vs bank loan: Which is right for your business?

For many businesses, financing can be the key to unlocking growth, supporting expansion, and meeting operational needs. Two popular options for business financing are asset finance and traditional bank loans. Each comes with its own set of advantages and potential drawbacks, making the choice a crucial decision for any business owner. 

In this article, we’ll compare asset finance and bank loans, examining their benefits and limitations to help you make an informed decision about which option might be best suited to your business needs.

Asset finance

Asset finance is a funding solution that allows businesses to acquire essential assets, such as equipment, vehicles, and machinery, by spreading the cost over time. Instead of paying the full amount upfront, businesses make regular payments while using the asset, with the option to own or return it depending on the type of agreement.

Advantages of asset finance

Asset finance offers a range of benefits, particularly for businesses that may find traditional loans challenging to secure or prefer a more flexible arrangement:

Easier access to funding

  • Asset finance may be easier to obtain than a traditional bank loan because the purchased asset itself serves as collateral. This security means that lenders may be more inclined to approve financing.

Quick processing and approval

  • Asset finance applications are often processed quickly, enabling businesses to access the funds they need promptly. For example, at Novuna Business Finance, we're known for our rapid turnaround times and exceptional customer service, as reflected in our high ICS scores. This speed can be especially beneficial when businesses need to act fast on growth opportunities or time-sensitive purchases.

Cash flow management

  • Asset finance allows businesses to spread the cost of acquiring assets over time, preserving cash flow for other expenses. By avoiding a large upfront payment, companies can maintain liquidity and allocate funds to operational expenses or new investments.

Flexible terms and repayment options

  • Many asset finance providers, including Novuna Business Finance, offer flexible terms and repayment options that can be tailored to each business’s unique needs. This flexibility is invaluable, allowing businesses to choose a payment plan that aligns with their cash flow and operational cycles.

Disadvantages of asset finance

While asset finance has many benefits, it’s also essential to consider the potential limitations:

Delayed ownership with hire purchase

  • On a hire purchase agreement, you will not own the asset outright until all payments, including the final Option to Purchase fee, are made. This arrangement can be a drawback for companies that want full ownership immediately.

Lack of ownership with leasing

  • A leasing agreement provides access to assets without ownership. While this may suit businesses looking to avoid the responsibilities of ownership, it can be limiting for those that prefer to build equity in their assets over time.

Potential deposit requirement

  • Depending on the asset finance product, businesses may be required to pay a deposit. This upfront cost can affect initial cash flow and may require some capital preparation.

Bank loan

A traditional bank loan is a well-known financing option that provides a lump sum amount, which businesses repay over time with interest. Bank loans are typically used for a wide range of purposes, from funding expansion to covering operational costs.

Advantages of a bank loan

Traditional bank loans offer a familiar and straightforward way to secure funding, with several notable advantages:

Variety of loan terms and repayment options

  • Banks often provide a broad range of loan terms and repayment options, giving businesses the flexibility to choose a repayment plan that aligns with their financial strategy. This flexibility can be helpful for companies that prefer customised repayment schedules.

Streamlined process for existing relationships

  • For businesses that already have a strong relationship with a bank, obtaining a loan can be relatively quick and straightforward. Established relationships can sometimes lead to preferential terms, making traditional loans a convenient option for businesses with longstanding banking partnerships.

Disadvantages of a bank loan

While bank loans offer flexibility and the potential for personalised terms, there are also several challenges that can make this option less appealing for some businesses:

Collateral requirements

  • Many banks require collateral or security for their loans, which can be a significant barrier for businesses without substantial assets. This requirement can make it difficult for newer or smaller businesses to qualify, particularly if they don’t own valuable property or equipment.

Dependence on existing relationships

  • Securing a substantial loan may require an established relationship with the bank. Without this, the approval process can become more difficult, and some businesses may find it challenging to qualify for larger amounts or more favourable terms.

In summary, both asset finance and traditional bank loans offer distinct benefits that can support a range of business goals. While asset finance provides flexibility, quick access, and the ability to secure assets without significant upfront costs, traditional bank loans can be beneficial for businesses with established banking relationships that seek tailored repayment plans and broader funding options. For businesses that want to avoid collateral requirements or preserve cash flow, asset finance may be the more attractive option, providing a competitive alternative to traditional loans.

Ultimately, the right choice will depend on your business’s financial health, asset needs, and long-term objectives.

Novuna and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.