A Quick Guide for Fixed Asset Financing
Many small businesses don’t have enough money to consider an outright purchase of assets, especially if the purchase involves large, expensive pieces of machinery. If this is the case with your business, fixed asset financing may be the best option for you. Even if you have enough cash saved to buy the desired asset, investing that cash could leave you with less working capital to finance operations, or to explore new growth opportunities.
Fixed asset-based financing offers flexibility in terms of cash flow and financial implications, and allows you to pay back these large assets over time. For example, it’s a common tactic to match the life of the asset with the loan term.
Here’s a step-by-step guide to asset financing.
Step 1: Decide what assets you need.
Start by listing the assets you need in order for your business to:
- Operate more efficiently – i.e. utilizing the latest technology, backup equipment, etc.
- Grow – i.e. to overcome current production constraints or to enter new markets
- Become more competitive – i.e. to match the capabilities of your competitors
Some examples of equipment financing:
- Other fixed assets
Step 2: Calculate your ROI.
It’s important to make a case for each asset purchase. Investors and lenders may want to see the evidence, but calculating your return on investment ahead of time also helps you make the right decisions.
The easiest method is to take the cost of the new asset and divide it by the number of years you consider it will last (adding any yearly maintenance and support costs). This is the dollar amount the new asset needs to generate in increased sales, better capacity, more capability, or some other indicator.
Step 3: Lease or buy?*
Sometimes leasing an asset makes more sense than owning it, especially when technological advancements are involved. Here are some examples:
- A lease agreement that includes upgrading fast-changing technology such as computers at agreed intervals can make more sense than purchasing current products. You don’t want to be stuck owning equipment with little resale value.
- Leasing expensive production machinery when you know that more efficient models will be coming shortly makes better sense than buying the machinery and then facing additional costs to compete with others.
- Leasing vehicles such as trucks can give you more flexibility than buying the vehicle, especially if demand is seasonal and surplus trucks would be standing idle.
*Speak to your accountant or financial advisor about any tax implications before deciding to buy or lease.
Step 4: Purchase new or used?
For some assets, like furniture or office equipment, second-hand purchases may suit your needs, and you’ll save money. Start-ups, for example, need to save money to market and grow their businesses.
Where to start your search:
- Attend local auctions and closing-down sales
- Bid on online auction sites such as eBay
- Attend local closing-down sales or reviewing classifieds in industry journals
Step 5: Consider your loan options.
Taking out a bank loan can be an effective way to finance business equipment purchases that you need, especially if it’s important to you to own the asset from the outset.
- Business Line of Credit – Borrow up to a certain limit and pay interest only on the portion of money you borrow.
- Business Term Loans – Based on a specific amount of money borrowed, with a specified repayment schedule.
- Won’t tie up any capital and may not require additional security
- Enables you to use your existing working capital and credit lines to generate income
- Allows you to take advantage of cash discounts offered by the seller
Loans should be structured to match the expected life of the asset – long-term loans for long-lasting assets such as a building, or short-term loans for assets with a shorter life expectancy.
Step 6: Gather supporting documents.
Prior to meeting with the bank, prepare the necessary documents to demonstrate why you need the asset and what contribution it will make to your business’s growth and profits.
Gather the following information:
- An updated cash flow forecast and business plan
- Evidence that the business generates sufficient spare cash to service the loan
- A pledge of available business assets and, in some cases, personal assets to secure the loan
Get started with a Fixed Asset Finance loan for your business
The key to successfully applying for asset or equipment financing is to be prepared. Do your research and talk to your accountant, financial advisor, and bank to ensure you get the right asset finance package that is tailored to your budget and business needs.
For more information on Pacific Premier’s fixed asset financing options, contact us.
The information expressed is being provided for informational and educational purposes only. It is not intended to provide specific advice or recommendations for any individual or business. Pacific Premier Bank does not provide tax, legal or accounting advice and the information contained herein should not be construed as such. You should carefully consider your needs and objectives before making any decisions. For specific guidance on how this information should be applied to your situation or business, you should consult your own tax, legal and accounting advisors before applying any recommendation. All loans subject to credit approval.