Asset Financing – A Financial Solution for Cash Flow Management
Over the years, both individuals and companies have had to raise funds for asset financing. These funds are used to acquire the machinery, equipments and even motor vehicles needed for their personal use or business operations.
Asset Financing can result in majority of firms experiencing cash flow problems which lead to business failures. One may however avoid such significant one-off expenses by financing the equipment, machinery or motor vehicle through asset financing.
Asset financing means the banks provide the finance needed to purchase the asset to the customer who makes monthly installment repayments. The asset financed is used generate cash flows and the same asset acts as collateral for the debt. His is usually not considered as a quick loan.
Asset financing has greatly helped businesses like the transport and manufacturing industries to expand and be able to plan for asset replacement. The tremendous growth in these industries has contributed greatly to the economic development by creating job opportunities.Asset financing consideration when lending to the customer:
Cash flow positioning and future projections for Asset financing
- The customers current cash flow, that is, how much does the business generate which determines the customer’s repayment ability.
- The projected cash flow increase. Once this new asset is acquired and operates at the optimum, there is expectation of improved cash flows all other factors will remaining constant.
Asset financing – Age and usage
- The age of the asset to be purchased especially for vehicles. Most banks have a limit to the age of the asset they can asset finance. This is to safeguard the customers’ interest and reduce any future high maintenance cost of the asset which would greatly affect the cash flow.
- The use of the asset – whether it is for personal or commercial use. This mainly applies to motor vehicle purchase as machines are basically acquired for business use. If the vehicle is for personal use, then the wear and tear is not as high as when it is for commercial use.
Customer contribution and involvement in Asset financing
- The customers’ contribution will also be taken into consideration. Most banks do not finance 100% the cost of the asset and mainly they peg the contribution on the age of the asst and even the use of the asset. The older the asset the more contribution by the customer and vice versa, while if the asset is for commercial use then the higher the contribution expected from the customer.
- The repayment period of this type of financing will depend on the current cash flow and sometimes the expected cash flow.
- Interest rate charged will greatly depend on the age of the asset and the use of the asset.
Small businesses should take advantage of this type of financing to enable them release their cash for trading and avoid the business being cash- starved. Asset financing is a financial solution for small and medium sized companies, which are the bank bone of many economies.