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Asset Financing

When raising money to start a business, the more traditional way would be to finance through a bank loan or through one’s savings. However, there is another alternative way to finance that could be helpful for someone without these options. This method is called asset financing.
            Asset financing is a contract for lease, hire purchase, or another negotiation for the purpose of obtaining necessary equipment such as machinery or transportation. Examples of this type of equipment would be the company vehicle or industrial machinery for an assembly line. Since these types of equipment can be individually financed, it could significantly reduce the lump sum of the commercial mortgage, enabling some to be more eligible for their loan.

Ways to Finance Your Assets

  • Leasing- This is considered the best way to go for the business owner. With this option, business owners can use the equipment for an extended period of time while paying a monthly payment. The monthly payment is tax deductible and at the end of their term they may exchange the old lease for a different product that suits their needs or simply lease a newer model. That way, they aren’t stuck with an old asset that isn’t worth enough money to be of value to their business.
  • Hire Purchase- This method of asset financing is the more common type of asset financing but the least favorable for business owners. A hire purchase is like getting a loan for a car. There are monthly payments to be made with interest and when the loan has been paid off the business owns the equipment or transportation. How viable this type of financing is depends largely on the terms of the contract, but it usually results in the business owner ending up with a vehicle or piece of machinery that is no longer useful to them and worth very little. In the long run, this type of financing is not very beneficial, but without any other option it has its short term benefits of obtaining necessary equipment for business use.

Accounting Assets

            When calculating accounts, the purchased machinery is placed into the books as an asset for its purchase value. Over time, the machinery or transportation will depreciate in value as it is being used, according to its life expectancy. Each type of equipment has a different life expectancy and rate of depreciation. When the initial value of the purchased equipment has dropped, the difference between the initial value and the current value is entered into the books as a cost against company profits.
            With this in mind, companies usually turn to leasing or hire purchase of needed equipment or transportation to cut down on the amount of depreciating assets on their accounts. In the long run, this gives the company a more profitable future.



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