When your business needs to invest in new fixed assets such as tooling, machinery, equipment, technical upgrades, or property, you’ll probably choose between using cash reserves or financing. The main advantage of financing an asset purchase is not having to pay upfront in full. Instead of tying up a significant amount of money in a single asset purchase, businesses can spread the cost over time.

Cash Reserves

If you have excess cash saved that you haven’t earmarked for anything else, it’s usually better to buy the asset. There will be no repayments or interest costs, and you can depreciate the asset each year. It’s better than having large amounts of cash lying idle in a savings account. Cash surpluses are best used to either grow the business or de-risk any future scenario.

Benefits of Financing an Asset

Most lenders offer a variety of financing options, including business lines of credit, business loans, and Small Business Administration (SBA) loans. You can structure the loan to fit the expected lifespan of the asset, e.g. longer-term loans for assets like property, and shorter-term loans for assets with a quicker depreciation.

The main advantages of financing an asset include:

• A smoother cash flow, which is crucial for any business. Regular, predictable payments make it easier to budget and forecast future financial needs. This stability allows businesses to plan for growth and other strategic initiatives without worrying about sudden large expenditures.
• Reducing the risk by spreading the cost of the asset over its useful life. This approach makes sure that businesses do not have to bear the full financial impact of an asset’s depreciation or obsolescence.
• Choosing from a variety of financing options, including leases, hire purchase agreements, and loans. Each option can be tailored to suit the specific needs and circumstances of the business.
• Being able to scale and grow without the need for significant capital outlays. This flexibility is particularly beneficial for small and medium-sized enterprises that may not have the financial resources to make large purchases.

Financing an asset helps businesses manage cash flow, mitigate financial risk, and provide flexibility for growth without large upfront expenses. If you’re considering a loan, talk to Diamond’s Business Lending Team about all our financing options or what you may need to apply for a loan.

Calculate the Return

This is how to determine the value of any new asset to your business. Take the cost of the new asset, add yearly maintenance and support costs, then divide the total by the number of years you believe the asset will last. This is the dollar amount the new asset needs to generate in increased sales, better capacity, more capability, or whatever measurement you deem important for that asset.

List any future assets you need in your business to:

• Operate more efficiently, possibly by using the latest technology to improve your operations, or by using additional equipment to help with current operations.
• Grow, especially if new equipment will enable you to increase your capacity.
• Become more competitive by enabling your business to match the capability of your key competitors.

Make a case for each asset purchase. Lenders may want to see evidence that the asset is necessary for your business, but it also helps you make the right financing decision.

Leasing an Asset

A lease is a contractual agreement between a lessor (the owner of the asset) and a lessee (the individual/business using the asset). The lessee is granted the right to use the asset for a specified period in exchange for regular lease payments. This arrangement allows businesses to utilize necessary equipment, machinery, vehicles, or real estate without purchasing the asset outright.

These are the main differences between a lease and a business loan:

• The lessor retains ownership of the asset throughout the lease term.
• Payments may cover the cost of using the asset, maintenance, insurance, and other related expenses.
• There may be restrictions on where and how you can use the asset.
• At the end of the lease term, there will be several options depending on the type of lease agreement, for example returning the asset, renewing the lease, or purchasing the asset at its residual value.
• The lease cost is an expense, and the asset isn’t added to your balance sheet.

Leasing an asset can sometimes be more beneficial than owning it. For example, a lease agreement that includes upgrades to fast-changing technology, such as computers, allows you to avoid being stuck with outdated equipment that has little resale value. Leasing production machinery can be a smart choice when more efficient models are expected to be released soon.

Leasing vehicles, like trucks, offers more flexibility, especially for seasonal demand, as it prevents idle vehicles. Additionally, leasing equipment that quickly becomes obsolete allows you to upgrade to the latest version once the lease term ends. Before making a decision to buy or lease, it’s advisable to consult with your accountant or financial advisor to understand the tax implications.

Next Steps

• Prepare detailed financial documents to demonstrate your business’s ability to service any loan. Include projections showing how the new asset will contribute to growth and profitability.
• Show that your business generates enough cash to cover loan repayments. This might include recent financial statements, cash flow forecasts, and profitability analyses.
• Be ready to pledge business and personal assets as collateral to secure the loan. Understand the implications and risks associated with this commitment.
• Clearly articulate why the asset is necessary for your business and how it will contribute to growth and profits. This might include case studies, market research, or testimonials from similar businesses.

The key to successfully applying for asset finance is to be prepared. Talking to your accountant, financial advisor and your lender will help make sure you get the right asset finance package tailored to your budget and your business needs.