Written byAsset finance is the umbrella term for business finance that pays for vehicles, equipment and other income-producing assets, with the asset itself acting as the security.
Also known as: asset financing, asset-backed finance, vehicle and equipment finance
Key points
- Some structures end in ownership (chattel mortgage, hire purchase at the last payment); with leases the financier keeps title (finance lease, operating lease).
- Because the asset is the security, it is usually easier and cheaper to obtain than an unsecured business loan of the same size.
- Repayments are fixed and matched to the asset's working life, typically one to seven years.
- It can also mean borrowing against assets you already own, such as a sale and leaseback.
How asset finance works
A lender or lessor provides the funds for a specific asset and takes security over it, either by holding title (leases and hire purchase) or by registering a security interest while you hold title (chattel mortgage). You make fixed repayments over an agreed term. If the repayments stop, the financier can repossess and sell the asset, which is why it can lend more readily than against the business alone.
The asset's resale value drives the deal: standard, easily resold assets such as utes, trucks and excavators attract the widest range of lenders and the best terms.
Types of asset finance
Equipment finance is the largest category and covers plant, machinery and vehicles. Within it, a chattel mortgage and hire purchase end in ownership, while finance and operating leases give you use of the asset with ownership staying with the financier. A novated lease applies the same idea to an employee's car through salary packaging.
Asset-based lending works the other way round: the business raises finance against assets it already owns, for example through a sale and leaseback or a loan secured over existing plant.
Who uses asset finance
Any business that needs equipment to earn its income and would rather keep cash for working capital: trades, transport, construction, agriculture, manufacturing, hospitality and health. It also suits businesses with limited trading history, because the asset carries part of the risk.
If you need cash for stock, wages or growth rather than a specific asset, a business loan or line of credit is usually the better fit.
Example
A transport operator needs a second prime mover. Instead of paying $180,000 in cash, it finances the truck over five years under a chattel mortgage. The operator owns the truck from settlement, the lender holds a security interest, the repayments are fixed for the term, and the truck starts earning revenue from the first week rather than after years of saving.
Not to be confused with
- Equipment finance
- equipment finance pays for a specific new asset, while asset finance also covers borrowing against assets the business already owns, such as a sale and leaseback
- Business loan
- a business loan is cash assessed on the business as a whole; asset finance pays for a specific asset and is secured by it
Frequently asked questions
What is asset finance in Australia?
In Australia, asset finance usually means the finance options used to pay for business vehicles and equipment: chattel mortgages, hire purchase, finance leases and operating leases, plus novated leases for employee cars. Lenders secure the finance against the asset, and the tax treatment depends on whether you or the financier owns it.
What is an example of asset financing?
A builder financing a $70,000 ute over five years with a chattel mortgage is asset finance: the lender pays the dealer, the builder owns the ute, and the lender holds a security interest until the loan is repaid. A fleet operator leasing ten vans on an operating lease is another example.
What is the difference between asset finance and a term loan?
A term loan is a lump sum of cash repaid over a set period and assessed on the business as a whole, often unsecured or secured against property. Asset finance pays for a specific asset, is secured by that asset, and is usually easier to obtain and cheaper because the lender can recover the asset if repayments stop.
Is asset finance the same as a lease?
A lease is one type of asset finance. Asset finance also includes loan structures such as a chattel mortgage, where you own the asset, and hire purchase, where ownership passes to you at the end. The right structure depends on whether you want to own the asset and how you want the tax and accounting to work.
Related terms
Narrower terms: Equipment finance, Chattel mortgage, Hire purchase
Equipment finance
Equipment finance is business finance used to buy or lease machinery, vehicles and other equipment, where the equipment itself secures the loan or is owned by the financier.
Read definitionChattel mortgage
A chattel mortgage is a business loan for a vehicle or equipment: you own the asset from settlement and the lender holds a security interest until it is repaid.
Read definitionHire purchase
Hire purchase is a finance agreement where a financier buys an asset and hires it to you for fixed instalments, with ownership passing to you at the final payment.
Read definitionFinance lease
A finance lease is a lease where the financier owns the asset and your business pays to use it for most of its life, taking on the risks of ownership.
Read definitionOperating lease
An operating lease is a lease where you pay to use an asset for a set term and hand it back, with the financier keeping ownership and the resale risk.
Read definitionNovated lease
A novated lease is a three-way car lease where your employer takes over the lease payments and deducts them from your salary, mostly before tax, while you work there.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.