Did you know that when it comes to financing your business’s growth, lenders look carefully at your assets?

What is an Asset?
An asset can be defined as something that is useful to, or of value, that is owned by an individual or business, which can be used to meet debts, commitments or legacies.

Generally assets are what help keep a business afloat. They can be sold during lean times, used as collateral during expansion phases and they help to produce a healthy balance sheet.

In today’s blog we take a look at the main asset classes and provide you with an overview of what to look for when financing assets.

Different Asset Types

Tangible Assets
These are used as part of the production process and are depreciated over time. They are considered highly liquid as they can be easily converted to cash. Often listed under the ‘Plant, Property and Equipment’ category on a balance sheet, they include items such as buildings, equipment, machines, computers, vehicles and inventory.

Intangible Assets
These are assets that have no physical form. Whilst not listed on the balance sheet, their intrinsic value adds to the credibility of the business, which contributes to a higher business evaluation. Intangible assets include a business’ reputation, company know-how, industry knowledge and name/brand recognition.

Intellectual Property
A variant of the intangible asset class, intellectual property includes trademarks, patents, brand names, logos, formulas, inventions and other creative communications that are often protected by copyright law. Like intangible assets, this asset class is not listed on a balance sheet, however without the information and value the intellectual property provides to the business, the business would not be as profitable.

The lifeblood of any business, cash is the mechanism that keeps the business moving and able to pay its commitments such as wages, rent, suppliers, utilities and much more. If a business has inadequate cash, it needs to sell off its other assets to avoid closure or bankruptcy. Cash comes from profits, loans, investors and gains from the sale of investments or business property.

Accounts Receivable
Many businesses maintain accounts receivables for sales made on credit or on an agreed intention to pay at a future date eg. 7, 14 or 30 days from delivery or at completion of project. Once this money is collected, the receivable decreases and cash increases.

Land is a long-term capital asset that is listed at its purchase price on the balance sheet (until sold). Changes in value are not reflected in any accounts until the date of sale, at which point any gain or loss is reflected in the cash and equity accounts.

A business shows prepaid expenses as assets for items (such as insurance and rent), that it will use in the future. Here, as the insurance or rental is used, the balance of the prepaid expense asset account decreases, with the expense recorded in the income statement. Some businesses have financial assets, such as stocks, bonds, currency and other items held as investments; the balance sheet reflects the fair market value of the investments.

What you Need to Know About Acquiring Asset Finance
When a business faces the prospect of acquiring finance, its fixed assets are a very important factor and are closely examined by prospective lenders, as they are usually an accurate indicator of the business’ financial health and obligations.

Lenders for the most part look at the following factors:
1. The type, age, and condition of equipment and facilities
2. The depreciation schedules for those assets
3. The nature of the company’s mortgage and lease arrangements
4. Likely future fixed asset expenditures.

On the flipside, you need to ask yourself:
● How much capital do I need to grow my business?
● When do I need to smooth the bumps in my cashflow?
● What are the tax outcomes of asset financing?
● How long will I need the equipment and will I need to upgrade it?
● Is technology rapidly changing in my industry?
● Do I want to ‘finance to own’ or ‘finance to return’ my asset?

There are many different ways to finance asset purchases for your business. Choosing the right one is difficult. However it’s important to note that the type of finance you choose can impact:

● When the legal ownership of the asset changes hands (e.g. when do you become the owner); and
● The amount and type of tax concessions available (e.g. who can claim the depreciation or monthly payment as a tax deduction).

To gain an overview of the different types of asset finance, simply refer to our previous blog, where we look at the various options such as debt finance, equity finance and the options that lie within.

It can be a challenging task to determine what type of finance would suit your business best. From cashflow consequences to tax obligations and more, it’s important to know how it will impact your business. To find out more about what finance suits you best, feel free to contact us today on www.abjsolutions.com.au or email admin@abjsolutions.com.au