More Ways Accounting Helps Your Business – Financing Major Purchases
When your company is in need of substantial assets, cash on hand typically won’t cover the bill. Luckily, many big assets come with seller ﬁnancing attached, and since the asset itself will be used for collateral, your company’s credit position may be less of an issue. Even with other lenders, asset- backed ﬁnancing can be easier to obtain than a general business loan that comes with no collateral, since the focus is on the value of the asset itself and the security it provides to the lender. In fact, as long as it doesn’t violate any covenants of your existing business loan from the bank, it can be better for your company to use a source of ﬁnancing other than your bank for asset purchases.
The Pitfalls of Asset-Backed Financing
Even though it can seem like a simple solution to credit problems, asset- backed ﬁnancing comes with some potential drawbacks of its own:
- Commerical ﬁnancing companies often charge very high interest rates on their loans.
- You may need to come up with a sizable down payment as part of the asset purchase, which can be a problem when cash is tight.
- Even though it’s with a different lender, the loan shows up on your balance sheet and in your debt ratio, which can make it harder to get additional business loans.
- Nonbank asset ﬁnancing companies are much more likely to seize the collateral asset if your company misses a few payments.
When your company already has a good credit standing, these issues can be minor or even nonexistent. It’s companies that are already struggling that get socked with higher interest rates and the worry of missing payments.
Consider Leasing Assets Instead of Owning Them
If your current debt ratio is cause for concern, look into leasing the assets you need rather than purchasing them. Leasing is very similar to standard asset-backed ﬁnancing with one very big exception: no new debt shows up on your balance sheet. Of course, the assets don’t go on your balance sheet, either, but that won’t make as big a difference to your perceived ﬁnancial position. Overall, leasing will be kinder to your cash ﬂow than will purchasing.
The ﬁnancing will still be based mainly on the value of the asset, and interest (usually still in the high zone) will be ﬁgured into your monthly payments. While you may still need to put some money down, it usually won’t be as much as it would have been if you were purchasing the asset. Plus, it can be much easier for a new company without credit history to get an equipment lease than an equipment loan.