Covid 19 has accelerated the growth of key industries such as retail, IT, Healthcare, and Cyber security to name but a few. Meeting the market demand and funding this growth can be challenging. However, asset finance provides a great solution for investing in the longer-term assets required by an organisation to underpin and support the necessary structures for growth.

Below is your business guide to asset finance, understanding it, and how it works.

Talk to a GRENKE Account Manager today to learn more

What is asset finance and how does it work?
Asset finance is the practice of using a company’s balance sheet assets (such as investments or inventory) as a security to borrow money or take out a bank loan against what it already owns. It can provide a secure and easy way of getting working capital for a business and spread the cost of tangible assets.

Why is it important to match the term of a loan to the life of the asset for which the finance was obtained?
The term of the loan should match the economic lifetime of the asset. Short-term finance will need to be paid back sooner and usually costs more than long-term finance. For example, the stock should be purchased using trade credit or a bank overdraft as it will be sold quickly and the funds it generates can be used to repay the debt. However long-term fixed assets such as premises should be financed using a mortgage giving the business sufficient time to generate revenue to repay the loan.

How do asset-based loans work?
Asset-based lending is the business of loaning money in an agreement that is secured by collateral. It uses the borrower’s assets as collateral and is often used by small to mid-sized businesses to cover short-term cashflow demands.
For example, a business might obtain a line of credit to make sure it can cover its payroll expenses even if there's a brief delay in payments it expects to receive. If the company seeking the loan cannot show enough cash flow or cash assets to cover a loan, the lender may offer to approve the loan with its physical assets as collateral.
Lenders prefer highly liquid collateral such as securities that can be readily converted to cash if the borrower defaults on the payments. Loans using physical assets are considered riskier.

What are assets in terms of finance?
In financial accounting, an asset is any resource owned or controlled by a business. It is anything that can be used to produce positive economic value. Assets represent the value of ownership that can be converted into cash (although cash itself is also considered an asset).
The balance sheet of a firm records the monetary value of the assets owned by that firm. It covers money and other valuables belonging to an individual or to a business. Assets can be tangible or intangible.

Are loans assets or liabilities?
Loans may or may not be a current asset depending on a few conditions. A current asset is an asset that will provide an economic value for or within one year.
If a party takes out a loan, they receive cash, which is a current asset, but the loan amount is also added as a liability on the balance sheet.
If a party issues a loan that will be repaid within one year, it may be a current asset.
If a party issues a loan that will be repaid after one year, it is not a current asset.

What does ‘information asset’ mean?
An information asset is any valuable information that the organisation has. An information asset can have many different forms: it can be a paper document, a digital document, a database, a password or encryption key, or any other digital file. Since they do not appear on a balance sheet, identifying information assets can be challenging.

What is the difference between asset and capital in finance?
Capital refers to the money a business owner has invested in a business, representing the difference between the business's assets and liabilities. Assets are things that add value to a business.

Would you finance a long-term asset with a short-term loan?
No, this goes against the fundamentals of financial management. It’s called a ‘maturity mismatch’. Funding long-term projects with borrowing (a liability) that must be repaid before the project can deliver added income, could drive the business into insolvency. Always match the term of the loan to the time it will take for the new asset to bring added income.

Talk to GRENKE today!

As one of the leading financial service providers in the Irish market, GRENKE’s slogan is ‘Fast, Forward, Finance’. GRENKE offers entrepreneurs fast and flexible financial solutions through a range of services including leasing and invoice finance. We match the perfect financial solution to your unique business needs, from small businesses to large enterprises.

Over the last 40 years, GRENKE has provided leasing to numerous styles of businesses and organisations; sole traders, partnerships, public and private limited companies, associations and organisations, medical, health, and educational providers, public hospitals, semi-state institutions, Government bodies and so much more. 

Our expertise and strong market position are no coincidence. If you are a business owner looking for financial solutions in Ireland or advice on fast and flexible financing, talk to a GRENKE Account Manager today.