asset financing business plan

Asset Financing

A type of borrowing related to the assets of a company

What is Asset Financing?

Asset financing is a type of borrowing related to the assets of a company. In asset financing, the company uses its existing inventory, accounts receivable , or short-term investments to secure short-term financing.

There are two ways to finance assets:

The first involves companies using financing to secure the use of assets, including equipment, machinery, property, and other capital assets. A company will be entitled to full use of the asset over a set period of time and will make regular payments to the lender for the use of the asset.

The second variation of asset financing is used when a company looks to secure a loan by pledging the assets they own as collateral . With a traditional loan, funding is given out based on the creditworthiness of a company and the prospects of its business and projects.

Loans given out through asset financing are determined by the value of the assets themselves. It can be an effective alternative when a company is not qualified to secure traditional financing.

• Asset financing is used in two ways: to secure the use of assets and to secure funding from a loan.
• Both provide financial flexibility for a company by increasing short-term funding and working capital.
• More companies can qualify for asset financing compared to traditional financing since the assets are used as collateral.

Why Use Asset Financing?

1. securing the use of assets.

The capital expenditures for purchasing assets outright can put a strain on a company’s working capital and cash flow. Using asset financing provides a company with the assets they need to operate and grow while maintaining financial flexibility to allocate funds elsewhere.

Purchasing assets outright can be expensive, risky, and hold a company back from expansion. Asset financing provides a viable option to acquire the assets the business needs without excessive expenditures.

With asset financing, both the lenders (banks and financial institutions) and the borrowers (businesses) benefit from the structure. Asset financing is safer for lenders than lending a traditional loan.

A traditional loan requires the lending of a large sum of funds that a bank hopes they will get back. When the bank lends assets out, they know they will be able to at least recover the value of the asset’s worth. In addition, if borrowers fail to make payments, the assets can be seized by the lender.

2. Securing a loan through assets

Asset financing also involves a business looking to secure a loan by using the assets from their balance sheet pledged as collateral. Companies will use asset financing in place of traditional financing because the lending is determined by the value of the assets rather than the creditworthiness of a company.

If the company were to default on their loans, their assets would be seized. Assets pledged against such loans can include PP&E , inventory, accounts receivable, and short-term investments.

Early-stage and smaller companies often run into an issue with lenders because they lack the credit rating or track record to secure a traditional loan. Through asset financing, they can receive a loan based on the assets they need to secure financing for their day-to-day operations and growth.

It is commonly used for short-term funding needs to increase short-term cash and working capital. The funds will be put towards a number of items, such as employee wages, payments to suppliers, and other short-term needs.

The loans are typically easier and faster to obtain, which makes them attractive to all companies. With fewer covenants and restraints, they are more flexible to use. The loans are usually accompanied by a fixed interest rate, which helps the company with managing its budgets and cash flow.

Five Types of Asset Financing

1. Hire Purchase

In hire purchase, the lender purchases the asset on behalf of the borrower. The borrower will make payments to the lender to pay off the asset over time. At such time, the asset is owned by the lender until the loan is paid off. Once the final payment is made, the borrower will be given the option to purchase the asset at a nominal rate.

2. Equipment Lease

Equipment leases are popular options for asset financing because of the freedom and flexibility it comes with. For an equipment lease, the business (borrower) will enter a contractual agreement with a lender to use the equipment for its business for an agreed-upon period of time.

Payments are made by the business until the contractual period ends. Once the lease is up, the business can either return the rented equipment, extend its lease, upgrade to the latest equipment, or buy the equipment outright.

3. Operating Lease

An operating lease is similar to an equipment lease, except equipment leases are usually for short terms, and operating leases are typically longer but not for the full life of an asset. As a result, operating leases are often a cheaper option since the asset is being borrowed for a shorter amount of time.

Payments are only reflected for the time the asset is used and not for the asset’s full value. Operating leases are beneficial to businesses looking for short to medium-term use of equipment to fulfill their needs.

4. Finance Lease

The defining feature of the finance lease is that all rights and obligations of ownership are taken on by the borrower for the duration of the lease. The borrower holds responsibility for the maintenance of the asset during the life of the lease.

5. Asset Refinance

Asset refinance is used when a business wants to secure a loan by pledging the assets they currently own as collateral. Assets, including property , vehicles, equipment, and even accounts receivables, are used to qualify for borrowing. Rather than a bank judging the business on its creditworthiness, the bank will value the pledged assets and create a loan size based on the value of the assets.

Key Takeaways

The two types of asset financing provide flexible options for businesses and their use of assets. When asset financing is used to obtain the use of assets from a lender, a company’s cash flow and working capital are less strained.

The other variation of asset financing is used when a company wants to secure a loan with their assets pledged as collateral. The loans are typically easier to get due to the loan being granted based on the value of the assets rather than the creditworthiness of the company.

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™  certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Bridge Financing
• Capital Expenditures
• Quality of Collateral
• Short-Term Loan
• See all commercial lending resources
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Home > Finance > Asset Financing: Definition, How It Works, Benefits And Downsides

Asset Financing: Definition, How It Works, Benefits And Downsides

Published: October 9, 2023

Looking for a clear definition of asset financing? Discover how asset financing works, its benefits, downsides, and why it's an essential aspect of finance.

• Definition starting with A

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Asset Financing: Definition, How It Works, Benefits and Downsides

Welcome to the FINANCE category of our blog, where we provide insights into various financial topics. In this blog post, we’ll delve into the world of asset financing – what it is, how it works, and its benefits and downsides. So, if you’re curious about this financing option, keep reading to learn more!

Key Takeaways:

• Asset financing allows businesses to acquire assets without paying the full price upfront.
• Assets such as equipment, machinery, vehicles, and even real estate can be financed.

What is Asset Financing?

Asset financing is a financial arrangement that enables businesses to acquire necessary assets without bearing the entire financial burden upfront. It involves obtaining funds from a lender, typically a financial institution, to purchase assets that are essential for operating and expanding a business. These assets could include equipment, machinery, vehicles, and even real estate.

In asset financing, the lender will provide the necessary funds, and the borrower will use those funds to purchase the desired assets. The borrower will then repay the loan, typically with interest, over a predetermined period of time. This arrangement allows businesses to access the assets they need to thrive without tying up their working capital or depleting cash reserves.

How Does Asset Financing Work?

Asset financing works through a structured agreement between the borrower and the lender. Here’s a simplified step-by-step breakdown of the process:

• Business identifies the need for a specific asset or assets.
• Borrower approaches a lender and applies for asset financing.
• Lender evaluates the borrower’s creditworthiness and determines the collateral and loan terms.
• If approved, the lender provides the necessary funds to the borrower.
• Borrower purchases the required assets.
• Borrower repays the loan, along with agreed interest, through regular installments over the agreed term.
• Once the loan is repaid, the borrower gains full ownership of the asset.

Benefits of Asset Financing

Asset financing offers several benefits to businesses, including:

• Preserved working capital: By financing assets, businesses can preserve their working capital for other operational expenses or unforeseen circumstances.
• Improved cash flow: Instead of making a large upfront payment, asset financing allows businesses to spread the cost of the asset over time, resulting in manageable monthly payments.
• Access to better-quality assets: Financing enables businesses to acquire high-quality assets that may have been otherwise unaffordable.
• Tax benefits: In certain cases, businesses may be able to deduct the interest or depreciation expenses associated with the financed asset.

Downsides of Asset Financing

While asset financing can be advantageous, it’s important to consider the downsides as well:

• Interest costs: Borrowing funds to acquire assets comes with interest charges, which add to the overall cost.
• Collateral requirement: Lenders often require collateral to secure the loan, which could put the borrower’s other assets at risk.
• Commitment period: Asset financing is a long-term commitment, and businesses must carefully assess their future financial capabilities to ensure they can meet the repayment obligations.
• Potential depreciation: Some assets may depreciate over time, meaning their value could decrease while the borrower is still repaying the loan.

In conclusion, asset financing is a valuable tool that allows businesses to acquire necessary assets while preserving their cash flow and working capital. However, it’s crucial for businesses to carefully evaluate the benefits and downsides before opting for this financing option.

We hope this blog post has provided you with a clear understanding of asset financing. If you have any further questions or would like to learn more about any other financial topics, be sure to check out our other blog posts.

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Do you know what your commercial finance options are? There are so many different borrowing options and platforms, many UK companies are still unsure what options are actually available to them. Asset finance is one of the most accessible and flexible forms of finance, with solutions covering all industry sectors and businesses. It is a form of leasing arrangement between you and a leasing company where instead of buying equipment outright, you enter into a hire agreement. You will hire equipment and pay an agreed monthly sum for a period of time that is usually between 1-5 years. There is an extensive range of asset finance solutions available. They are used to describe a wide range of products that can provide funding against physical assets being supplied such as plants, equipment, vehicles, technology and machinery. Choosing a specialist lender (one that operates in your industry sector) offers the benefit of being able to get advice in regards to your particular business asset-use. This can result in better uses for your equipment, or the realisation of alternative income streams. Firstly, let’s be clear on what asset finance is not, it definitely isn’t a last chance finance option. Most businesses that can get business loan finance still prefer to apply for asset finance because it provides much more flexibility.

A flexible form of finance

When a business requires capital to fund purchases, explore growth opportunities or pay suppliers – asset finance solutions are available:

• For SMEs who constantly battle with rising costs , asset finance helps spread purchases into a manageable size.
• To enable quicker decision times from lenders, which mean quicker delivery of machinery, vehicles and equipment.
• That allow payment terms to be spread over short, long or extended terms and can be negotiated and amended whilst still in contract.

SMEs find asset finance suitable because it allows them to get hold of the equipment they need in order to operate, trade, and grow without having to access lines of secured or unsecured credit elsewhere. Payments are also made over a fixed period of time, making it easy to manage in terms of budget planning.

When Asset Finance Is The Right Finance

News reports about the economy can be confusing, and it doesn’t always apply to an individual’s unique business circumstance.

If your business is looking for a cash injection or looking to expand, you may find the EU uncertainty, interest rate rises and rumours of another downturn might be putting you off. Yet there are many businesses that still rely on external investments, regardless of the wider economic situation. Most will approach their bank first, but there are plenty of reasons not to; applications process, conservative lending policy, and high-interest rates are just the start. However, asset finance solutions have the ability to help nearly all businesses. Here are some situations you might be familiar with, where accessing commercial asset finance is the right call to make:

To Save Money

Asset or rental leasing means you only pay the value of the asset during its useable life. You don’t pay an upfront premium for your new machinery/technology, which means you can generate immediate returns.

For Financial Control 

Commercial asset finance allows you to maintain control over your monthly expenditure, so you can keep track of your costs.

Inbuilt Risk Management

Tech industries have fast-moving technology requirements and asset leasing them means removing the risks of them becoming obsolete. This enabled you to upgrade and react to your business environment quicker.

For Quick Decisions

Asset finance deals can be made quickly, meaning you can identify what suits your company best and move with minimal delay. Assets come with security attached, so acceptance is always easier.

For Tax Savings  

Using commercial asset finance can help with your tax bill. All lease payments are categorised as expenses and are fully deductible from your profits for corporation tax purposes.

You Need Working Capital 

Any cash reserves are protected and maintained as the equipment isn’t paid for in one lump sum, leaving cash for growth or other opportunities.

You Are Risk Averse

Business can be volatile, if there is any chance of defaulting on your asset finance agreement, you will only lose the asset and won’t be personally liable or your home at risk. So if you want to release cash from your assets, buy or replace assets, start a new business, then commercial asset finance could work for you.

Asset Finance vs Traditional Bank Lending

Small businesses wanting growth will invariably seek an unsecured bank loan. If you don’t qualify for one, then where do you go? Unsecured loans are the least costly form of borrowing, but many small businesses can’t get accepted by traditional bank lenders due to:

• Not having a long enough track record
• Not having a high enough credit rating
• Not having a convincing enough business plan

It means a significant number of businesses are being turned down for loans, which jeopardises chances of further growth. Asset finance is a viable alternative source of lending and unlike bank loans, it’s already got security attached. Traditional bank lending is usually calculated by looking at your current and future cash flow. This may include putting your operations up for scrutiny, while asset finance is based only on the asset you put up for finance. For traditional lending, the criteria and application process can be lengthy. They can entail application forms, meetings with the bank, discussing payment terms, and interest rates and analysing business performance past, present and future. Even banks themselves are becoming increasingly reluctant to arrange loans and lend to small businesses. This trend has grown to such a point that some SMEs don’t even consider the option of arranging a business loan with their bank at all. With traditional lending focused heavily on their own internal lending criteria, asset finance providers can provide ongoing liquidity through a number of asset-based lending streams. Whether it is a company’s working capital i.e., their balance sheet, or through purchasing on a lease basis and freeing up cash flow.

The reason many small businesses are choosing to use asset finance as their first lending option, and not traditional lending is two-fold.

– Lengthy and often tiresome hoops that need to be jumped through to satisfy bank criteria

-The flexibility and speed offered by asset finance providers.

How To Apply For Asset Finance

Make sure you know what kind of asset finance you need, so you can prepare all your information for a successful application. While asset finance is viewed as safer due to the inherited security of the asset being financed, it’s still important to ensure that all your finances are presented clearly when applying.

Identify exactly what your business needs

Depending on your business needs and whether it is a start-up, expanding or needing to free up cash will dictate the type of finance. It could be invoice finance, bridging finance, merchant cash advance, bank loans or asset finance.

Look at more than one asset provider

While some types of equipment can be provided by multiple lenders, other specialist machinery might only be offered by a few. Always make sure you do your homework, consulting and comparing with what each provider offers.

Provide as much information as possible

Lending criteria, especially asset lending have toughened up. Ensure that you include (in addition to the standard asset finance box-ticking) any additional details that might be required including: – Company details – Industry particulars – Business figures including customers and turnover – Asset particulars – Proposed asset use – Term expectations – Payment expectations – Financial health – Recent bank statements – Company performance history

– Details of existing finance agreements – Forecasts based on successful asset finance.

Finally…Read the small print

As with any other financial agreement, asset finance comes with plenty of small print. Financial products love to be wrapped up in cosy layers of financial jargon. Always ask questions to make sure you understand exactly what is involved when you sign. Lenders are far less likely to approve an application if they have to second guess your suitability and creditworthiness because of omissions on your application.

Using Asset Finance To Grow Your Business

Asset finance is one of the best ways you can channel investment into your business, while still maintaining cash flow. Asset finance can save your company money, which means more investment money available to grow your business elsewhere.  

Asset finance for start-ups

If you’re a start-up or new business, you’ll want to be able to buy the equipment or the machinery needed to operate successfully. Asset finance helps by offering hire purchase or leasing where purchase payments are broken down into affordable monthly sums. It’s a tactic that most start-ups utilise due to the security of the finance.

Using existing business assets to raise capital

You can use asset finance to purchase or borrow against any ‘fixed asset’ you own i.e., your computers, equipment, vehicles, technology, plant, machinery and furniture. Anything can be held as security by the finance provider against the loan. Asset finance doesn’t include stock, although you can use the benefits of asset-based lending to purchase more stock and fulfil more customer orders- fuelling growth and boosting cash flow.

Asset-based lending when factoring is limited

Despite being one of the most convenient ways in which to access cash from unpaid invoices, invoice finance can still limit your options to improve business growth. Delayed payments and seasonally slow sales can affect your cash flow. You may also be in a tricky situation where you are making enough to generate more sales but need extra funding in order to make them. Using one of your assets, you can secure a loan against it and then pay it back with interest.

Asset finance for short-term growth

If you are looking for a quick decision or need to take advantage of industry opportunities, then asset finance, like invoice finance or asset-based lending, are forms of finance agreed quicker than traditional loans. New facilities can be set up in just a few days and you can start releasing cash flow immediately. For asset-based loans, finance providers are often specialists in your field that can provide you with specialist advice. They can see your wider industry and the opportunities within it when basing their lending limits.

How asset finance can save on tax

Using asset finance to lease machinery, equipment or vehicles can also be a handy tax-saving procedure. All your lease payments can be offset against your profits, as they are seen as business expenses. Buying outright means you can only write down for depreciation and loan interest, this can often be less than your lease payments. Remember VAT is payable on the rental, not the purchase price, which can also help cash flow. Asset finance can be a useful financial product at every stage of business growth. It is a flexible form of finance and has more tangible benefits than traditional bank lending. If you get your application right,  it can be one of the quickest forms of funding options available to you. It is also able to provide benefits such as freeing up cash flow, without needing additional security. The size of the finance can vary from £1,000 to £100,000 and comes with tax and maintenance benefits. Asset finance is one of the most popular forms of finance in the UK.

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Asset-Based Lending for Businesses: A Comprehensive Guide

Already valued at $625 billion globally, asset-based lending for businesses is expected to more than double in the next seven years, according to Maximize Market Research . Small businesses, which often struggle to raise capital through traditional debt and equity instruments, are driving this surge. On this page, we’ll cover how it works, its benefits and risks, and what’s involved in preparing for an application so you can ensure your business gets the right funding for your needs.

Understanding Asset-Based Credit: What it is and How it Works

Asset-based lending (ABL) is a form of alternative business financing in which loans are provided to a business and secured by company assets. It’s sometimes referred to as collateral-based lending. With ABL, you can unlock the value trapped in your assets to provide liquidity for operations, expansion, or other financial needs.

The asset-based lending process is fairly straightforward. A lender evaluates the asset you want to use as collateral and determines what percentage of the asset’s value it can provide as a loan. The funds may then be disbursed in a lump sum or offered as a line of credit. If they’re provided as a lump sum, you’ll pay the balance back in installments with interest, similar to the way a term loan works. If you receive the funds as a line of credit, you can tap into it as needed and pay the balance back like you would a credit card .  

Types of Assets Used for Lending Purposes

A few examples of assets commonly used in ABL include:

• Receivables: The most commonly used type of asset in ABL is receivables. Often referred to as accounts receivable financing , the process involves receiving a loan based on the value of your invoices. A close alternative is invoice factoring . Rather than receiving a loan and debt that must be paid back, the business sells its invoices to the factoring company, and the client that owes the balance pays it, not the business.
• Inventory: Using inventory as collateral, businesses borrow against the value of products they hold before they are sold.
• Equipment: Heavy machinery, office equipment, and other tangible assets can be used as collateral in an equipment loan .
• Real Estate: Commercial properties can also be used, though this is less common in ABL compared to traditional mortgage lending.

Asset Valuation for Lending

The amount of money your lender is willing to provide based on the value of your collateral is referred to as the borrowing base. The lending value of an asset is determined through appraisals and evaluations by the lender, considering factors such as market value, condition, and the liquidity of the asset type. Receivables are evaluated based on factors like the age of the invoice and the creditworthiness of your client, while inventory is assessed on scalability and market demand.

Asset Liquidity and Lending    

Asset liquidity refers to how quickly and easily an asset can be converted into cash. It plays a crucial role in ABL. Highly liquid assets, like receivables, can support higher borrowing amounts, while less liquid assets, such as specialized equipment, may be discounted more heavily by lenders. It’s generally best to work with a lender who understands your industry and can provide an accurate valuation to ensure you receive the highest amount of funding possible.

Benefits of Asset-Based Lending for Businesses

Asset-based financing options offer many benefits, especially over traditional loans. Below, we’ll take a look at these and compare asset-based lending vs. traditional loans.

Improved Liquidity and Cash Flow

Small businesses often struggle with cash flow, especially when they’re growing. Because ABL unlocks capital trapped in assets, cash flow improvement is easily achieved.

Greater Flexibility

Asset loan terms and conditions often have more flexibility than traditional loans. The borrowing base can adjust with the value of the collateral assets, which can be particularly beneficial in times of growth or fluctuating asset values. Moreover, the use of funds is generally not as restrictive as it might be with other types of financing, giving you more discretion over how you leverage the capital.

Increased Access to Funds

Asset-based loan eligibility is primarily based on the value of assets rather than a long credit history or strong business credit score . Because of this, asset financing strategies work well for younger businesses and those with thin credit files compared to other forms of lending.

Competitive Rates

The assets secure asset-backed business loans, so lenders often view ABL as lower risk. This can translate into more competitive rates for the borrower compared to unsecured lending options.

Reduced Dilution

Often, younger businesses that don’t qualify for loans are forced into equity financing, which means giving up equity stakes in the company. This isn’t a concern when leveraging assets for loans.

Customizable Structures

ABL can be tailored to the specific needs and assets of your business, allowing for a more customized financing solution. This could involve a revolving line of credit based on receivables and inventory, a term loan secured by equipment, or a combination of these things.

Support Through Cycles

Asset-based lending can provide vital support through various economic and business cycles. Since the funding is tied to tangible assets, you might find maintaining or securing loans with business assets easier through downturns , assuming the assets retain their value.

Speed to Funding

The process of securing an asset-based loan, particularly when based on receivables, is often faster than other business financing solutions. This makes it easier for you to respond quickly to financial emergencies, changes, and opportunities.

Asset-Based Lending for Working Capital

Asset-based lending allows a company to borrow against various types of collateral, providing additional working capital for your business when rapid growth or new opportunities arise. In particular, middle-market businesses may not be eligible for traditional bank loans, but they can use asset-based loans or lines of credit to improve cash flow and meet their working capital needs. This lending solution involves the use of physical assets, such as equipment or real estate, as collateral, allowing businesses to access financing options that align with their unique circumstances. Asset-based loans offer competitive rates and customizable structures, allowing companies to capitalize on growth opportunities while securing the necessary funds.

Navigating the Asset-Based Lending Process

It’s essential to understand the components of an ABL deal to make informed decisions and ensure a positive financing experience. We’ll review a few key aspects below.

Addressing Asset-Based Lending Risks

Familiarizing yourself with the risks of ABL can help you prepare for issues and avoid some of the pitfalls.

• Asset Depreciation: The value of collateral assets can decrease over time, potentially affecting the borrowing base and the amount of credit available. This is less of a concern when you’re leveraging an asset like your receivables.
• Operational Oversight: Lenders may require more frequent financial reporting or operational oversight, which can become a hassle for businesses. Work with a partner that digitizes and automates the process as much as possible to minimize the impact.
• Costs and Fees: ABL might come with additional costs, including appraisal fees, facility fees, and potentially higher interest rates, affecting the overall costs of borrowing. Choose a lender that offers competitive rates to start.
• Liquidity Risk: In cases where your business cannot repay the loan, the asset may be liquidated. Sometimes, this is not enough to recover the entire loan amount. Be prepared to cover the difference or choose an option like invoice factoring, in which you’re able to supply an alternate invoice of equal or greater value or draw from your reserve.

Preparing for the Asset-Based Lending Application

While each lender is different, preparing for the ABL application is typically straightforward. A few things you’re likely to need are outlined below.

• Financial Documentation: Have your financial statements, including balance sheets, income statements, and cash flow statements, ready.
• Asset Inventories: Compile comprehensive lists of assets intended as collateral, including invoices, inventory reports, and equipment lists, with as much detail as possible. Your lender can walk you through specifics.
• Legal and Compliance Documents: Ensure all legal documents related to asset ownership and company operations are in order and readily accessible.
• Business Plan: Having a solid business plan can help lenders understand how the borrowed funds will be used and how the loan fits into your overall strategy.

Understanding Terms and Conditions of Asset-Based Loans

Asset-based loans have different terms and conditions than traditional loans. It’s essential to familiarize yourself with them before signing a contract.

• Borrowing Base: Understand how your borrowing base is calculated, including which assets are eligible and how their value is determined.
• Covenants: Be aware of any covenants or conditions tied to the loan, such as financial ratios you must maintain or restrictions on further borrowing.
• Fees and Interest Rates: Review all associated fees and interest rates and how they are calculated to avoid surprises.
• Default Conditions: Know what constitutes a default and the potential consequences, including how quickly the lender can call the loan or take control of the collateral.

Explore Asset-Based Lending for Your Business

Financial planning with asset-based loans can seem complicated, but it doesn’t have to be. At Viva Capital, we offer a variety of alternative funding solutions to help ensure you’re matched with the right options for your needs. Factoring, for example, is as accessible as asset-based lending, but it is often easier to manage and doesn’t create debt that your business needs to pay back. To learn more or get started, request a complimentary factoring quote .

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Asset Financing: How It Works and Real-Life Examples

Last updated 03/28/2024 by

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What is asset financing, understanding asset financing, the difference between asset financing and asset-based lending, secured and unsecured loans in asset financing, secured loans, unsecured loans, the evolution of asset financing, benefits of asset financing, quick access to capital, lower interest rates, utilizing existing assets, enhanced creditworthiness, drawbacks of asset financing, risk of asset seizure, short-term solution, interest payments, examples of asset financing, manufacturing company, retail business, construction firm, asset financing vs. equity financing, asset financing and tax implications, depreciation benefits, interest deductibility, capital gains and losses, frequently asked questions, is asset financing suitable for startups and small businesses, what types of assets can be used for asset financing, how does asset financing differ from equity financing, are there tax benefits associated with asset financing, what happens if a company defaults on an asset financing loan, key takeaways.

• Asset financing allows a company to secure a loan by using its balance sheet assets as collateral.
• It is typically used to cover short-term working capital needs.
• Asset financing is chosen by some companies over traditional financing because it relies on the value of the assets themselves rather than the lender’s perception of the borrower’s creditworthiness and future prospects.

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Asset Financing

The borrowing or lending of money using a company's balance sheet assets

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at  Scale Venture Partners , focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

What Is Asset Financing?

• Why Do We Use Asset Financing?
• Types Of Asset Financing
• Advantages And Disadvantages Of Asset Financing

Asset Financing Vs. Asset-Based Lending

Secured and unsecured loans in asset financing, what assets can be financed.

Asset financing is the practice of borrowing money or receiving a loan using the assets listed on a company's balance sheet , such as short-term investments , inventory, and accounts receivable . A security interest in the assets must be given to the lender by the business borrowing the money.

It is the borrowing or lending of money using a company's balance sheet assets, such as short-term investments, inventories, and accounts receivable. A security interest in the assets must be given to the lender by the company borrowing the money.

The first includes businesses employing finance to secure the use of assets such as equipment, machinery, real estate, and other capital assets. A corporation will fully use the asset for a specified time and make regular payments to the lender for its usage.

The second type is employed when a business seeks to get a loan by putting its assets as security. A conventional loan provides cash based on a company's creditworthiness and the prospects of its business and initiatives.

The value of the assets themselves decides asset financing loans. However, it might be a viable option when a firm cannot obtain regular finance.  

Asset finance varies significantly from typical financing in that the borrowing firm gives part of its assets in exchange for a rapid cash loan. 

A typical financing arrangement, such as a project-based loan, would include a more time-consuming procedure consisting of business planning, forecasts, etc. Asset finance is frequently employed when a borrower needs a short-term cash loan or operating capital. 

The borrowing business often promises its accounts receivable when employing asset finance. Nevertheless, using inventory assets in the borrowing process is not unusual.

Why do we use Asset Financing?

It is frequently utilized as a short-term financing option to pay staff and suppliers or to support expansion. As opposed to typical bank loans, it offers a more flexible method of financing. In addition, it provides a straightforward approach to raising working capital for expanding enterprises and start-ups.

The two primary uses are:

1. Securing the use of assets

Capital expenditures for outright asset acquisitions may impact a company's working capital and cash flow . It enables a business to purchase the assets it needs to operate and grow while maintaining the financial flexibility to shift money to other areas.

Complete asset acquisition can be expensive, risky, and restrict a company's ability to grow. Therefore, this financing is an effective way for a business to get the assets it needs without paying astronomical prices.

Both lenders gain from the asset financing arrangement (banks and financial institutions) and the borrowers (companies). Therefore, it is usually safer for lenders than traditional lending.

A conventional loan necessitates the lending of a big quantity of money, which the bank intends to recoup. When a bank lends an asset, they know they can recoup at least the asset's value. Furthermore, if borrowers fail to make payments, the lender may confiscate their assets.

2. Securing a loan through assets

This financing also refers to a situation in which a business seeks to get a loan by putting up assets from its balance sheet as security. Since funding is based on the value of the assets rather than the company's creditworthiness, businesses will choose asset finance over conventional financing.

Assets will be removed from the company if it doesn't repay its loans. PP&E, inventories, accounts receivable, and short-term investments are assets that can be pledged against such loans.

Early-stage and smaller businesses sometimes have difficulties with lenders because they lack the credit rating or track record required to receive a standard loan.

However, through asset financing, they can get a loan based on the assets they need to acquire finance for their day-to-day operations and growth.

It is frequently used to improve working capital and liquidity to meet short-term financial demands. Payroll for employees, supplier payments, and other urgent needs are only a few of the uses for the money.

All firms find loans enticing since they are frequently quicker and easier. They have fewer covenants and restrictions, so they are easier to utilize. The loans often come with a predetermined interest rate , which helps the company manage its cash flow and budget.

Types of asset financing

There are numerous significant categories of asset financing, as well as a few minor variants. Each has its advantages and limitations, but they all adhere to the above-mentioned rules.

It has five primary types:

1. Hire Purchase

It is also known as a " lease  purchase," where the lender acquires the asset on behalf of the borrower. The borrower will pay the lender over time to pay off the support. The lender now owns the asset until the debt is paid off. Then, the borrower will be allowed to acquire the asset for a minimal fee after the last payment.

2. Equipment Lease

Because of their independence and flexibility, equipment leases are attractive asset financing choices. The business (borrower) will enter into a contractual arrangement with a lender to utilize the equipment for its business for an agreed-upon time for such a lease.

The firm makes payments until the contractual time expires. When the lease expires, the company can either return the borrowed equipment, renew the lease, upgrade to newer equipment, or purchase the equipment entirely.

3. Operating Lease

An operational lease is similar to an equipment lease, except that equipment leases are often for short periods. In contrast, operating leases are generally for more extended periods, although not for the whole life of an asset.

As a result, operational leases are frequently less expensive because the asset is borrowed for a shorter period.

Payments are only recorded for the period the asset is utilized, not for the total value of the item. As a result, operating leases are advantageous to firms seeking short- to medium-term use of equipment to meet their demands.

4. Finance Lease

It can be called " capital lease "; as it differs from other types of asset financing in that the company only ever rents the assets involved. But, again, money is provided in monthly installments according to an agreed-upon plan. 

This usually lasts until the financing provider has recouped the asset's purchase price. In some cases, the financing company may allow the firm to receive a portion of the sale price of an item after it has been sold. The company does not have the option of buying the asset altogether.

A company may be able to deduct rental payments from its profits for tax purposes. Long financial leases, on the other hand, make this impossible. 

The loan firm retains the right to capital allowances, but the business is allowed to recover VAT . The borrower assumes full ownership rights and duties for the lease term, which is a distinguishing feature of the financing lease. During the lease term, the borrower is responsible for the asset's upkeep.

5. Asset Refinance

Asset refinancing is used when a company wishes to obtain a loan by offering current assets as security. 

Assets like real estate, automobiles, equipment, and accounts receivable are used to qualify for loans. Instead of appraising the firm based on its creditworthiness, the bank will evaluate the pledged assets and produce a loan amount based on the asset value. 

There are two types of asset refinancing: 

• The first is simply utilizing a company's assets (physical or intangible) as collateral for a loan.
• The second, more appropriately known as asset-based lending, occurs when a company sells an asset to an asset financing provider for an agreed-upon lump payment. The company then leases back the asset from the loan provider, recouping the lump sum paid.

Asset refinancing varies from a standard secured loan in that a company can utilize physical assets that it only partially owns as security, but only up to the amount of equity in that item.

Moreover, there is a variation called "Contract Hire or Vehicle Asset Challenge."

This type of asset finance solely applies to autos. A company that wants to grow its fleet will contact a contract hire supplier, who will locate the necessary vehicle(s). The company makes regular payments over the agreed-upon lease term.     

Maintenance and service expenditures are the provider's responsibility, not the business's. Fleet management services may be included in the standard contract hire fees for more prominent organizations with several cars.

Contract hire has the advantage of freeing a corporation of the time and money-consuming tasks that come with standard vehicle ownership. 

The supplier is responsible for locating and purchasing a new car and all maintenance and servicing expenses. The supplier also bears responsibility for the vehicle's disposal after the lease period.

Advantages and disadvantages of asset financing

Despite its practical benefits, asset financing isn't without drawbacks.

While it provides immediate access to capital, enhances cash flow, and may offer tax benefits, it also exposes businesses to risks such as asset depreciation, higher interest costs, and potential loss of assets.

The advantages of Asset Financing include:

• Traditional bank loans are more challenging to get.
• Fixed payments simplify planning and cash flow management.
• The majority of contracts have fixed interest rates.
• Failure to pay results solely in the loss of assets, nothing else.
• When employing asset finance to acquire a high-value item, the equipment serves as collateral for the loan.
• If you lease or hire expensive equipment or cars, the supplier is responsible for all maintenance and service charges, not your company (depending on the type of finance deal arranged).
• It avoids using critical capital for purchases, allowing enterprises to put this money to use better.
• The risk of depreciation may lie on the provider rather than the company. Furthermore, if the item has to be replaced before the end of the agreed-upon asset finance period, the supplier must return it at their own expense (depending on the type of finance deal arranged).

The disadvantages of Asset Financing are:

• There is a threat of losing critical assets essential for corporate operations.
• The value of the assets used to secure a loan might vary, with low values possible.
• Not as successful for long-term funding.
• Failure to pay will result in the removal of the equipment. This might cause significant issues if it is a critical component of your firm.
• Unless otherwise indicated, leasing or hiring contract financing may imply paying for an object you will never own.
• A standard loan arrangement may not cover damage not covered by service or maintenance (such as accidental damage). This implies you'll have to pay for it or seek appropriate insurance.

Many firms can benefit from asset finance, but ensuring that this financing strategy is appropriate for your business model is critical.

Asset-based financing uses real estate or vehicles as collateral for loans made to people who want to buy homes or cars.

If additional assets are utilized to assist the borrower in qualifying for the loan, they usually are not considered direct security on the loan amount with asset financing.

The loan defaults if it is not returned within the specified time frame, and the lender may seize and sell the car or other property to recoup their loss. At their most fundamental, asset finance and asset-based lending are phrases that essentially mean the same thing, with a minor distinction.

Businesses typically use it to borrow against assets that they already own. For example, a loan might be secured by receivables, stock, equipment, buildings, and warehouses. 

These loans are typically utilized for short-term financial needs, such as funds to pay staff wages or acquire raw materials needed to manufacture the offered items. 

As a result, the company is using its current assets to compensate for a shortfall in operating cash flow rather than purchasing a new asset. The lender may still take assets and sell them to recoup the loan balance if the company defaults.

Asset financing was formerly seen as a last-resort mode of financing, but over time, this source of cash has lost some of its stigmas. 

This is especially true for small enterprises, new companies, and other organizations that lack the credentials to be approved for traditional funding sources, such as a track record or credit rating.

Loans can be made in one of two ways. The most typical type of loan requires a firm to pledge an asset as collateral for the debt or a secured loan. 

The lender evaluates the value of the pledged asset rather than the firm's overall creditworthiness. The lender may seize the item pledged as security for the debt if the loan is not paid back.

Unsecured loans don't need security, but the lender can have a strong claim on the business's assets if they aren't paid back. 

If the company declares bankruptcy, secured creditors frequently receive a more significant portion of their claims. Due to this, fast loans often offer lower interest rates, making them more alluring to companies needing funding.

There is no general rule for an asset to be financed; however, providers will consider a wide range of high-value products for Purchase, leasing, or borrowing. 

These assets preferably fit the DIMS standards. That is to say, the assets at issue are: 

• Durable : they are capable of generating flows of goods and services 
• Identifiable : consists of anything that can be separated from the business and disposed of, such as machinery, vehicles, buildings, or other equipment.
• Moveable : any asset item that can be removed without causing material damage to the Project Area or any permanent structures thereon.
• Saleable : an engine or any Equipment that :
• is an Eligible Asset.
• is held for sale, consignment, or in inventory and is not subject to a Lease.
• is not unmerchantable or obsolete, 
• is physically tagged or identifiable by part or serial numbers
• complies with all applicable Aviation Authority requirements.

Furthermore, two types of assets may be financed: hard assets and soft assets.

1. Hard Assets:  These are physical assets, as the name indicates, and might comprise high-value goods such as machinery, plant, equipment, or cars. Buildings, warehouses, and other commercial properties can also be considered under such financing.

2. Soft Assets:  These are less durable items that may have little to no resale value by the time the loan arrangement expires. This can include software packages, IT equipment, furnishings, electronics (including CCTV, security systems,...), and other equipment with a limited lifespan.

It is excellent for any company that wants to purchase assets to develop and function more effectively. It may be suited for many businesses, including single proprietorships, small to medium-sized firms, and more prominent corporations.

Lastly, asset financing can purchase equipment, machinery, and even automobiles. It can also free up capital in existing assets (a refinance). Asset finance can help spread the expense of high-value products, and regular payments may make budgeting easier.

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How Asset-Based Financing Works for Growing Businesses

It’s my pleasure to explain in detail a financing instrument that I think not many executives consider when setting out their business plan.

For most founders (or soon-to-be founders), venture capital is the holy grail. But there are plenty of instances where this route isn’t going to be the best fit. Or more accurately, where it isn’t going to be enough and cheap enough.

To build a company with lots of expensive physical assets, you’ll need a lot of capital up front. So if you can get a loan using those very same assets as collateral, those assets pay back the loan with the money they bring in. Which is essentially asset-based financing in a nutshell. This post explores the ins and outs of asset-based financing, to show you why it makes so much sense for companies like ours and whether it might be a good fit for yours.

So let’s start with a few details about Cluno.

Cluno - car subscription services

Cluno  is a mobility startup that was founded in 2016 in Munich, and went live in 2017. It’s the first independent car subscription provider in Germany. We offer customers mobility. They book a car with us for a minimum term of six months, and all those little details and costs that come with owning a car - registration, insurance, radio license fee, wear and tear, and tyre changes - are covered by the monthly subscription fee.

I joined in 2018. We had around 300 customers, and 25 employees at the time. Now we’re over 100 employees, and my team is now over 20. One of our major milestones was reaching over €140 million in refinancing last September - and it’s grown since. And we’re prepared for a massive scale-up this year and into next.

We work together with a range of 14 OEMs (original equipment manufacturers), which means we have a wide variety of makes and models available for our customers. And, of course, we need to refinance all of those cars. That can be done in multiple ways.

We lease some cars with OEM leasing companies - which is very common and not terribly interesting from a finance perspective. We also buy some cars using various forms of credit and factoring finance.

But mainly, we also use asset-based finance in SPE (special purpose entity) structures. This is pretty common in leasing and car financing. There are big programs like the VW Driver Facilities, or BMW Blue Skies. But it’s very uncommon that a startup only two years old would be able to make this happen.

What is asset-based financing?

Asset-based financing is where you receive a credit or loan from a bank, granted against your assets and their cashflows, and not against the company itself. So there’s not the risk of having the bank loan secured against the company. The risk exists in the asset, and maybe also in the usage of the asset.

For us in the car business, that means that all those cars are transferred to an SPV (“special purpose vehicle”) which is a separate legal entity. “Vehicle” here has nothing to do with cars - it simply means that we create a new company separate from ourselves, to limit liability.

That separate legal entity has ownership of the cars, along with all those customer contracts. The bank knows that the assets in question are car subscriptions to individuals, and that those individuals will pay a certain amount for a fixed term (or longer).

The bank knows that the asset has an inherent value. They know our purchasing conditions, and there are data providers that give a second opinion. Based on that, the bank generates an interest rate that is very attractive.

Advantages for growing businesses

First, there’s access to funds, obviously. But every installment in this series is about financing.

The asset-based route does have a few distinct positives for companies like ours, though.

It uses credit

One advantage to us - compared with leasing - is that it’s still a credit. If for any reason we want to repay the credit - let’s say one particular car has an accident, or if we want to refinance our whole portfolio because we find a better rate elsewhere - there is no additional cost.

If you refinance that car with leasing or factoring, there would be additional costs. And those would probably kill the unit economics on their own.

And of course, we’re not diluting shares in the company. The bank doesn’t own any part of the business itself. When you have existing financiers and investors already, that’s hugely important.

Competitive interest rates

One key difference from some other financing instruments is the interest rate. Common credit financing for startups - mostly venture debt - might include 10% or more in interest. That would kill the unit economics of our model. We need cheaper financing, and asset-based refinancing is the one way to reach it.

Conversely, it’s pretty common to be at around 4% for structures like ours. There is a certain risk involved in car financing. Cars can lose value. And customers have some default risks too. And it was a great thing for Cluno as a small startup to be able to get this value.

Term flexibility

We’ll talk about how much time and effort goes into setting up asset-based credit shortly. This is significant, and is definitely a disadvantage.

But the positive side of this is, once it’s up and running, it’s very easy to extend contracts or take on more financing partners. If another bank wants to match the conditions we’ve been given by our current bank, it’s all set up. We can just use the same legal documents, covenants, and reporting we already have in place.

So in the long term all that work can really pay off.

Disadvantages with this approach

I’m a big fan of this approach, clearly. But it’s not all rosy.

Here are a few things to be aware of if you’re ready to test out asset-based financing.

Major time and money up front

It takes a lot of time and effort - including legal effort - to build this structure. And that’s very expensive, obviously. For example, it’s very common that the company receiving credit pays their own lawyer to draft the documents, but also the bank’s lawyer. That’s just the way it is.

But we’re also usually talking about large sums. At Cluno, we closed our deal for €50 million. So those legal fees, although pretty high, might not even be as high as a small increase in our interest rate.

Even so, you have to pay these fees up front, which can be pretty heavy for a startup. And of course in Germany, it all has to be notarised. So that’s more time, effort, and money.

Banks are generally looking the same sorts of factors as equity investors would. They look closely at the business model and the team. For us, it helped that I had worked in the banking industry for 10 years, and my colleague had worked for a major OEM on transactions like these.

But even with these advantages, we started the round in September 2018, and we closed it in September 2019.

Legal requirements and reporting

There are also a lot of covenants to be met. We have to give a full report of all assets every month. Credit analysts come to Cluno and check how we conclude contracts, how we pay invoices related to the cars, how we book entries in our accounting system, and whether those things are all valid, recognisable, and auditable.

These might not be processes that the usual startup would have in place. These things take so much time and effort and not every startup has the skills from the beginning.

We knew we had to do it in order to get this credit. So we set it up 99% perfect from the beginning of Cluno, because it was simply a necessity. If someone wanted to do this for the first time - with processes that weren’t very stringent - I guess they would have to do an internal data collection phase to later hand off to the banks. You have to have an insolvency policy, a collection policy, and all sorts of extra documentations.

So again, it’s a huge upfront effort and expense. But once it’s set up, everything is much easier. Today it just runs automatically. But a data engineer had to commit weeks to setting up the database - just working on that one topic. So it’s a serious commitment.

Who should consider asset-based financing?

It’s not only applicable to cars. Take the company Grover which offers  tech subscriptions . You can get your Airpods or a new drone with them as a sort of lease. They use a similar structure to ours to refinance their tech equipment.

Generally speaking, this instrument works for companies with assets that are used to generate income streams. It must be a tangible asset, and it must generate some cash back over time.

So you could even do it with real estate, for example. That’s mostly done with very professional providers, and usually over the long term. Institutional investors look to invest their money for 30 years or more. But the principles are the same.

In essence, if you have valuable assets that bring money into the business, asset-based financing may well make sense. But as we’ve seen, this requires a lot of work at the outset, and it really pays to have someone on the team who’s been there, done that. Conclusion

While not suitable for every business, asset-based financing provides a real opportunity for companies to acquire revenue-making resources without paying massive upfront costs. Which may be news to many founders, who felt that raising capital through equity was the only way.

As we’ve seen, this approach requires an enormous level of diligence from the beginning. You need to understand what banks will require from you, and put processes in place to answer every question they have quickly.

But when executed successfully, asset-based finance gives you the capital you need, without losing precious ownership of your business.

And that’s almost always worth the effort.

Dr. Veronika von Heise-Rotenburg  is CFO of  Cluno , a car subscription service that lets users pay to use a car for a minimum of six months, with all costs except gas covered by a monthly fee.

Before this role, Dr von Heise-Rotenburg served in financial leadership for several leading automotive companies, with significant experience in risk management and procurement as well as with McKinsey for banking projects during the financial crisis of 2008/2009.

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What Is Business Financing?

Unless your business has the balance sheet of Apple, at some point you will probably need access to capital through business financing. Even many large-cap companies routinely seek capital infusions to meet short-term obligations . For small businesses, finding a suitable funding model is vitally important. Take money from the wrong source, and you may lose part of your company or find yourself locked into repayment terms that impair your growth for many years into the future.

Key Takeaways

• There are many ways to find financing for a small business.
• Debt financing is usually offered by a financial institution; it requires regular monthly payments until the debt is paid off.
• In equity financing, either a firm or an individual invests in your business (and you don’t have to pay the money back).
• If you decide to seek equity financing, the investor—whether it's a firm or an individual—now owns a percentage of your business (and perhaps even a controlling one).
• Mezzanine financing combines elements of both debt and equity financing: The lender usually has the option to convert unpaid debt into ownership in the company.

What Is Debt Financing?

Debt financing is a concept you may already be familiar with if you have a mortgage or an automobile loan. Both mortgages and automobile loans are forms of debt financing. Debt financing for a business comes from a bank or some other lending institution. Although private investors can offer debt financing to you, this is unusual.

Here is how debt financing works: When you decide you need a loan , you head to the bank and complete an application. If your business is in the early stages of development, the bank will check your personal credit.

For businesses that have a more complicated corporate structure—or have been in existence for an extended period—banks will check other sources. The  Dun & Bradstreet (D&B) file is one of the most important sources of information on the credit history of a business. In addition to the credit history of your business, the bank will likely examine your books and complete other  due diligence before agreeing to lend you any funds. Before applying, make sure all your business records are complete and organized.

If the bank approves your loan request, it will set up payment terms—including interest.

Advantages of Debt Financing

There are several advantages to financing your business through debt:

• The lending institution has no control over how you run your company, and it has no ownership.
• Once you pay back the loan, your relationship with the lender ends. That is especially important as your business becomes more valuable.
• The interest you pay on debt financing is tax deductible as a business expense.
• The monthly payment, as well as the breakdown of the payments, is a known expense that can be accurately included in your forecasting models.

Disadvantages of Debt Financing

However, debt financing for your business does come with some disadvantages:

• Adding a debt payment to your monthly expenses assumes that you will always have the capital inflow to meet all business expenses, including the debt payment. For small or early-stage companies, this may not always be true.
• Small business lending can be slowed substantially during recessions. In tougher times for the economy, it can be difficult to receive debt financing.

During economic downturns, it can be much harder for small businesses to qualify for debt financing.

The U.S. Small Business Administration (SBA) works with certain banks to offer small business loans . A portion of the loan is guaranteed by the government. Since SBA loans are designed to decrease the risk to lending institutions, these loans allow business owners who might not otherwise be qualified to receive debt financing. You can find more information about these and other SBA loans on the SBA’s website.

What Is Equity Financing?

Equity financing comes from investors, who are referred to as venture capitalists or angel investors .

A venture capitalist is usually a firm, rather than a single individual. The firm has partners, teams of lawyers, accountants, and investment advisors who perform due diligence on potential investments. Venture capital firms often deal in significant investments, so the process is slow and the financing is often complex.

Angel investors, by contrast, are generally wealthy individuals who want to invest a smaller amount of money into a single product—instead of building a business. An ideal candidate for an angel investor, for example, is a software developer who needs a capital infusion to fund their product development. Typically, angel investors move fast and want simple terms.

Equity financing comes from an investor, not a lender. if you end up in bankruptcy, you do not owe anything to the investor, who, as a part owner of the business, simply loses their investment.

Advantages of Equity Financing

Funding your business with funds from investors has several advantages:

• The biggest advantage of equity financing is that you don't have to pay back the money. If your business enters bankruptcy, your investors are not creditors. They are partial owners in your company; their money is lost along with your company.
• You don't have to make monthly payments, so there is often more liquid cash on hand for operating expenses.
• Investors understand that it takes time to build a business. With equity financing, you get the money you need—without the pressure of your product or company being required to thrive within a short period of time.

Disadvantages of Equity Financing

Similarly, there are several disadvantages to equity financing:

• When you raise equity financing, it involves giving up ownership of a portion of your company. The more significant (and riskier) the investment, the more of a stake the investor will want. You might have to give up 50% of your company. Unless you later construct a deal to buy the investor’s stake, as a partner they will take 50% (or more) of your profits, indefinitely.
• With equity financing, you'll be required to consult with your investors before making any business decisions; if an investor has more than 50% of your company, you have a boss now.

What Is Mezzanine Financing?

A lender is always looking for the best value for its money—with the least amount of risk. The problem with debt financing is that the lender does not share in the business's success. All the lender receives is its initial funding—plus interest—while taking on the risk of default. That interest rate will not provide an impressive return—it will likely only offer single-digit returns.

Mezzanine financing often combines the best features of equity and debt financing . Although there is no set structure for this type of business financing, debt capital often gives the lending institution the right to convert the loan to an equity interest in the company if you do not repay the loan on time—or in full.

Mezzanine financing is not as common as debt or equity financing . The deal, as well as the risk-reward profile, is specific to each party.

Advantages of Mezzanine Financing

Choosing to use mezzanine financing comes with several advantages:

• This type of loan is appropriate for a new company that is already showing growth. Banks may be reluctant to lend to a company that does not have at least three years of financial data. However, a newer business may not have that much data to supply. By adding an option to take an ownership stake in the company, the bank has more of a safety net, which can make it easier to secure this type of loan.
• Mezzanine financing is treated as equity on the company’s balance sheet . Showing equity—rather than a debt obligation—makes the company look more attractive to future lenders.
• Mezzanine financing is often provided very quickly.

Disadvantages of Mezzanine Financing

There are some disadvantages to securing mezzanine financing:

• The coupon or interest is often higher because the lender views the company as high risk. Mezzanine financing provided to a business that already has debt or equity obligations is often subordinate to those obligations, increasing the risk that the lender will not be repaid. Because of the high risk, the lender may want to see a 20% to 30% return.
• Much like equity financing, the risk of losing a significant portion of the company is genuine.

Off–balance sheet financing is good for one-time large purposes, allowing a business to create a special purpose vehicle (SPV) that carries the expense on its balance sheet, making the business seem less in debt.

Off–balance sheet financing (OBSF) is not a type of loan. It is a strategy a company can use to keep large purchases (or debts) off its balance sheet, which can make the business look stronger (and less debt-laden). For example, if a company needed an expensive piece of equipment, it could lease it instead of buying it—or it could create a special purpose vehicle (SPV) to hold the purchase on its balance sheet. The sponsoring company often overcapitalizes the SPV to make it look attractive in the event the SPV needs a loan to service the debt.

Off–balance sheet financing is strictly regulated, and generally accepted accounting principles (GAAP) govern its use. This type of financing is not appropriate for most businesses, but it may become an option for small businesses after they achieve a larger corporate structure.

If your funding needs are relatively small, you may want to first pursue a less formal type of financing. Family and friends who support your business can offer advantageous and straightforward repayment terms. And you can set up a lending model similar to some of the more formal models. For example, you could offer them stock in your company—or pay them back just as you would a debt financing deal, in which you make regular payments with interest.

You can borrow from your retirement plan and pay that loan back with interest. However, an alternative—called Rollover for Business Startups (ROBS) —has emerged as a practical source of funding for those who are starting a business. When appropriately executed, ROBS allows entrepreneurs to invest their retirement savings into a new business venture—without incurring taxes, early withdrawal penalties, or loan costs. However, ROBS transactions are complex, so working with an experienced and competent advisor to conduct these transactions is essential.

How Do You Finance a Business?

There are many ways to finance your new business. You could borrow from a certified lender, raise funds through family and friends, finance capital through investors—or even tap into your retirement accounts, although this isn't recommended in most cases. Companies can also use asset financing , which entails borrowing funds using balance sheet assets as collateral.

Equity financing is the process of raising capital by selling shares in your company . If you finance your business using equity financing, your investors will own a stake in your business.

Can I Borrow From My 401(k) to Start a Business?

You may take out a loan from your 401(k), but this is not always advisable. Most plans allow you to withdraw a maximum of $10,000—or 50% of your vested balance (whichever is greater)—but there is a $50,000 cap. There are strict rules on repaying your account. If you go this route, make sure you can pay yourself back. It can be risky to take out a loan to fund a start-up because most people have to keep their traditional day job with their employer. If you leave with a loan on your plan, you will be required to repay the loan—plus taxes and penalties for an early withdrawal.

Every business eventually needs financing. It can be advantageous for your business to avoid financing from a formal source, but not everyone has this option. If you do not have family or friends who are willing to support your company, debt financing is likely the most accessible source of funds for a small business. You can grow the credit profile of your business with on-time, regular payments.

As your business grows—or reaches later stages of product development—equity financing or mezzanine financing may become options.

Dun & Bradstreet. " About Us ."

Internal Revenue Service. " Guide to Business Expense Resources ."

U.S. Small Business Administration. " Loans ."

Dr. Ajay Tyagi. " Capital Investment and Financing for Beginners ," Page 150. Horizon Books, 2017.

Accounting Tools. " Mezzanine Financing Definition ."

U.S. Securities and Exchange Commission. " Final Rule: Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations ."

Internal Revenue Service. " Rollovers as Business Start-Ups Compliance Project ."

Internal Revenue Service. " Retirement Plans FAQs Regarding Loans ," See #4.

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Asset finance explained

Want to buy or lease hard assets for your business? Or perhaps you have assets you wish to borrow against? Asset finance might be the solution.

Page written by Michael David . Last reviewed on June 25, 2024 . Next review due October 1, 2025.

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What is asset finance?

Asset finance is a term used when business borrowing is tied directly to the value of a hard asset such as property, vehicles or equipment.

If you need to acquire one of these assets but don’t have the cash to pay for it outright, or would prefer to use your cash for other purposes, asset finance allows you to spread the cost over time. You make smaller, regular payments during a fixed term. Fees and interest are charged in addition to the cost of the asset. You have full use of the asset throughout the term.

Depending on the terms, you may be responsible for the repair and maintenance of the asset or that responsibility may rest with the finance company. At the end of the term, ownership of the asset may return to the lender or be transferred to you.

Alternatively, if you already own a valuable asset and wish to access its value in cash, you may be able to transfer the asset as collateral to a lender, who provides a loan based on its value. This type of loan is known as asset refinance.

How does asset finance work in America? What types of asset finance are there?

There are six main types of asset finance:

• Hire purchase.  This option allows your company to buy a new asset in instalments instead of paying a large, upfront sum. You own the vehicle or equipment once you finish making the payments. In most cases, the asset appears as a positive item on your balance sheet from the start of the agreement, but the provider owns the asset until the last instalment is paid. This means you cannot sell the asset during the term. A small fee, called the Purchase Option Fee is often required to transfer ownership of the asset to you. With hire purchase, you are responsible for the asset’s upkeep.
• Finance lease.  A finance lease, sometimes also known as a capital lease, is an agreement where a leasing firm buys a business asset on behalf of your company and then rents it out to you. You make monthly payments until you cover the cost of the equipment, plus interest. You can then choose to extend the rental period, return the equipment, or sell the asset to a third party on behalf of the leasing firm. In some cases, you may share in the proceeds from the sale of the asset. Note that although you may never own the asset, you are responsible for insurance and maintenance costs during the rental period.
• Equipment leasing .  Equipment leasing is like finance leasing except you have the option to own the equipment at the end of the contract. Over a fixed term you rent the equipment from a vendor or a leasing firm and make regular payments. The leasing firm is responsible for the maintenance of the equipment. At the end of the rental period, you can extend the lease, return the asset to the lender, upgrade the item, or buy it outright by making a balloon payment. Depending on the size of your company and its needs, you can rent everything from laptops and printers to commercial vehicles and machinery. 

Because equipment lease agreements are based on the depreciation of the asset, not the full price, monthly lease payments are typically less than hire purchase.

• Operating leasing.  Although similar to finance leasing, an operating lease is usually used for specialized equipment that a company only wants for a limited period or that it never wants to own outright. You rent the asset over the short or medium term, making regular payments for the time it is in your possession. One of the biggest advantages of this type of lease is that you can upgrade the equipment regularly, sometimes even during the rental period.
• Asset refinance.  Asset refinancing falls into two categories. In the first, a company pledges its assets as security against a loan. This means the lender may sell the assets to recover their funds if you default on the loan. Once the principal, fees and interest have been repaid, the asset returns free and clear to you. Buildings, land, future contracts, unsold stock, plant, and equipment can all be used as collateral. Because the loan is secured by hard assets, costs are usually lower than they are with other types of business financing.

The second category of asset refinance is called  asset-based lending , or sale and hire purchase back. In this type of agreement, you sell a hard asset to a specialist finance company for an agreed lump sum. You then lease back the asset from the finance provider, thus repaying the lump sum. This circular arrangement allows you to free up cash immediately and pay it back in small increments over time. You also get to continue using the asset during the repayment period. Once the loan is repaid, the finance company owns the asset, and you may choose to continue renting it, buy it back or walk away.

• Contract hire.  This is strictly for vehicles, and commonly known as vehicle asset finance. It’s a good option if you want to save time and effort sourcing and maintaining your own fleet of vehicles. With this type of asset financing, a provider finds and maintains the vehicles for the business, who then pays regular instalments over an agreed lease term. Fleet management services may be included in the contract hire costs. At the end of the leasing period, the provider assumes responsibility for the disposal of the vehicles.

What are the advantages of using asset finance?

• Low or no upfront cost to purchase big-ticket items
• Spread the cost over time
• Benefit from having the asset immediately
• No need for extra collateral, since the asset is the collateral
• Can be cheaper than other forms of business financing

Depending on the type of arrangement you have, it may also be possible to have the finance company cover maintenance expenses and/or replace the item if it becomes faulty during the rental or loan period.

What are the disadvantages of asset finance?

• You might not own the asset until it is fully paid for, or never at all
• If you fail to keep up the payments, the provider may repossess the asset
• Financing terms are generally long – almost always more than 12 months
• You may be liable for damage to the asset
• There may be limits on the use of the equipment (such as annual mileage on a vehicle) with penalties for going beyond the limits

Want help getting started on asset finance?  Join Swoop  to check out your options in minutes.

What are examples of asset finance?

Delivery company.  A local delivery company depends on its fleet of trucks to reach customers. There is an opportunity to expand into a nearby city, but it will mean adding at least six new trucks to the fleet. Through an agreement with a leasing company, the delivery company receives the trucks it needs in exchange for making monthly lease payments. The leasing company also offers fleet management services, which means it will maintain the trucks during the lease and dispose of them at the end of lease.

Engineering firm.  An engineering firm uses high-value machinery that it owns free and clear. The company now wants to access some of the value in those machines to invest in expanding its market share . They pledge the equipment as collateral for a loan, which they use to grow into new territories. The company makes regular payments until the loan is paid back and ownership of the machinery is transferred back to the business.

Asset finance vs. bank loans – what’s the difference?

The main difference between asset finance and a bank loan is that asset finance always uses a hard business asset like property, machinery or vehicles to secure funding. This allows for a lot of flexibility in term of the terms and structures that are possible, including various loans, leases and rental arrangements. It often also helps keep costs down, since any lending is secured by collateral.

Banks can also offer loans that are secured by collateral , so there can be some overlap in that sense. However, bank loans may also be secured by non-business assets, such as a personal residence, or might not have any assets for collateral at all. In these cases, banks may have different lending criteria based on things like analyzing your business operations and cash flow projections.

Why is asset finance a good funding source for American SMEs?

In some cases, asset finance is a good choice simply because other options are limited. For example, you may own valuable equipment on one hand and need an injection of cash on the other hand. In this situation, asset refinance might be the most direct way to turn a hard asset into liquid cash.

In other cases, it just makes sense from a  cash flow  point of view. Why sink valuable cash into a long-term purchase when those funds can be used elsewhere to grow your company? Asset lending and leasing options are available to help you acquire the tools you need right away and pay for them at a pace that you can handle.

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Is my business eligible for asset finance?

Small business loans can be used for almost every legitimate business activity. Use your loan to buy equipment, real estate, plant, vehicles, machinery, even a business. Use it as working capital to expand, start a new business, or take on more staff. You can even use a low-cost business loan to pay off more expensive short-term business debt.

Can I get a small business loan to buy a business?

The short answer is yes, you can. The longer answer is, yes you can, but do your homework first. Buying an existing business with a loan can have advantages over starting a business from scratch. You buy an established brand, an existing customer base, supplier contacts, track record, stock, perhaps even premises. Set against this are the ‘Goldilocks’ factors that lenders are looking for:

• Have you evaluated the business you wish to buy?

Have you thoroughly checked the accounts, the assets, spoken to suppliers and customers, researched the market value of the business, and considered the long-term potential? (It’s not a fad). Lenders need concrete answers to these questions. It pays to be prepared.

• Business reputation.

Does the business have any negative aspects – like supply chain issues, or employee grievances? Business ethics are also important.

• Customer opinion and expectations.

What do existing customers say about the business? Is it viewed in a negative or positive light? What are customer expectations? Will they be there to support the business a year or so from now? Where will new growth come from?

Is a small business loan secured or unsecured?

If your business is able to meet its financial obligations, the answer is yes. Whether you are a solo entrepreneur, a partnership, a corporation or a new startup, there are asset finance solutions from a variety of lenders to fulfil every need.

Calculating the best type of asset finance, the lowest rates, and the ideal lender for your business can be very time-consuming.  Join Swoop  and we will do the hard work of comparing options for you.

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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At Swoop we want to make it easy for SMEs to understand the sometimes overwhelming world of business finance and insurance. Our goal is simple – to distill complex topics, unravel jargon, offer transparent and impartial information, and empower businesses to make smart financial decisions with confidence.

Find out more about Swoop’s editorial principles by reading our editorial policy .

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• Business Finance

How To Get Asset Financing

Review your options carefully when considering asset finance for your small business.

Many businesses don’t have enough money to consider an outright purchase, making asset finance a necessity. You have a number of options.

Should your consider asset finance?

Asset finance makes sense for many businesses. Even if you have enough capital, investing your cash in assets leaves you with less working capital to finance operations or explore new growth opportunities.

The flexibility of asset finance options (with different cash flow and financial implications) can allow you to grow your business faster, generate more profit or simply make better purchasing decisions.

First decide what assets you need

Start by listing the assets you need in your business to:

• Operate more efficiently by using the latest technology.
• Grow – perhaps by using equipment to overcome current production constraints or to enter new markets.
• Become more competitive by matching the capability of your key competitors.

Calculate your return on investment (ROI)

It’s important to make a case for each asset purchase. Investors and lenders may want to see the evidence, but it also helps you make the right decisions.

Requiring staff to make a case for asset acquisitions is a useful discipline for those lobbying for new equipment. It can sort out a genuinely productive investment from a vanity item. For example, most employees would like the latest smartphone or a new company vehicle, but would this purchase really add to the business’s bottom line?

Should you lease rather than buy?

Sometimes leasing an asset can make more sense than owning it. For example:

• A lease agreement that includes upgrading fast-changing technology such as computers at agreed intervals can make more sense than owning these items. 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.

New vs. secondhand assets

Do the assets you need really have to be brand new or would secondhand equivalents serve your purpose? Startups especially need to save every dollar to market and grow their business.

Most businesses can save considerably on everything from office furniture to production equipment by:

• Attending local auctions and closing-down sales.
• Bidding on online auction sites such as eBay.
• Attending local closing-down sales or reviewing classifieds in industry journals.

Consider taking out a loan

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.

The advantage of a loan is that it:

• Doesn’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 and short-term loans for assets with a shorter useful life.

Our range of finance options

Comerica offers a range of financing solutions, including a business line of credit and term loans.

Small Business Administration (SBA) Loans

We’ve worked hard to establish ourselves as an SBA preferred lender. Whether you’re looking to expand your business, or purchase equipment or real estate, a Comerica Small Business Administration (SBA) Loan can assist with financing to help your company grow.

We’ll work with you to evaluate your needs and find an SBA Loan for your situation.

Nearly 90 percent of all businesses are eligible for an SBA loan program. The general qualification standards for SBA lending are less stringent than many other types of loans, but the same issues are considered such as:

• Acceptable personal and business credit history.
• Owner-occupied business.
• Past earnings and/or estimated future earnings sufficient to repay the loan on time.
• A list of available business assets and (in some cases) personal assets to secure the loan.

Be sure to prepare your case

Chatting to your accountant, financial advisor and your bank will help to ensure you get the right asset finance package tailored to your budgets and your business needs.

You can assist your case for asset finance if you come prepared with:

• An updated cash flow forecast and business plan.
• Evidence that the business generates sufficient spare cash to service the loan.
• A pledge of available assets.

Be prepared also to demonstrate:

• Why you need the asset.
• What contribution it will make to your business’s growth and profits.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

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• Assets or Collateral

What Is Asset-Based Lending?

Asset-based lending is a type of business financing in which the lender secures the agreement with an asset or collateral. Asset-based lending can give the borrower either a loan or line of credit.

Collateral for asset-based lending doesn’t need to be real estate. Other more liquid assets, like receivables, inventory, purchase orders, and potentially equipment, can also act as collateral. You can leverage one or more of these assets to secure a loan or an ongoing credit facility/line of credit for your business.

Unlike other financing options, your business can qualify for asset-based financing with a low credit score or no history. Rather than meeting traditional requirements, you can qualify based on your receivables, inventory, or other assets.

Asset-based lines of credit and loans help you capitalize on the value of your liquid assets immediately. Instead of waiting for payments, you can get working capital to cover expenses like growth, expansion, additional inventory purchases, and more.

How Does Asset-Based Lending Work?

Asset based lending works like most other business financing options—you get cash to drive your business growth and pay it back over time. Asset-based lending, however, involves putting up an asset (which will be explained below) as collateral. You can choose to put up real estate, but there are many other options that may be simpler, easier, and less risky.

It’s not uncommon for new and older businesses to experience cash flow issues due to rapid growth or slow-paying customers. In these situations, asset-based lending helps you unlock instant cash to use immediately by leveraging assets like receivables, inventory, and more. Many businesses utilize asset-based lending for standard working capital needs or shortages, during seasonal slow periods, and to cover slow-paying receivables.

When you put an asset up as collateral, you’re reducing the lender’s risk and giving them confidence because they’re given a security interest in the asset. As a result, this may reduce your interest rate. However, interest rates can vary based on a number of factors.

While there are a number of types of collateral, lenders tend to prefer highly liquid assets like receivables to illiquid options like equipment. Nonetheless, you can still find great options by putting up your equipment as collateral.

Types of Assets You Can Use as Collateral

Asset-based lending relies on collateral, but that doesn’t mean you need physical collateral like land or real estate. In fact, there are several types of collateral you can utilize to secure term loans or lines of credit and raise the borrowing base.

However, keep in mind that lenders will find some types of assets more valuable than others. Lenders tend to prefer assets with more liquidity because they provide added security with minimal risk. Nonetheless, you can generally utilize illiquid assets like land and real estate, especially if you’re looking to add security with other assets in the mix.

Accounts Receivable or Invoices

Utilize unpaid invoices from late-paying customers to unlock new cash and invest in the future of your business.

Put up unsold inventory as collateral. While your inventory may be valued at wholesale, rather than market rates, you can still gain significant leverage.

Purchase Orders

Instead of turning down future sales due to working capital shortages, sell future sales to receive cash for materials and capitalize on your opportunities.

Secure your financing with a hard asset, like collateral. The easier a lender can resell the equipment on the secondary market, the better your equipment will function as collateral.

Real Estate

Real estate can add extra security for hard money lenders, but is best used in asset-based lending when coupled with more liquid assets. It’s a great form of secondary collateral that you can use to qualify for additional financing when receivables don’t cover exactly what you need.

Unsure of which collateral you can use to qualify for asset-based lending? After applying, speak with your lender about the assets you have available and learn which would make the most sense based on your needs.

Advantages of Asset-Based Financing

The Advantages of Asset-Based Financing

In today’s business lending environment, there are plenty of options that you can qualify for without putting assets up as collateral. However, putting up assets as collateral may prove beneficial if you’re in need of cash.

There are a number of reasons that your growing business should consider this underutilized financing option:

• Without putting up real estate, you can get cash to grow your business
• Asset-based loans and revolving lines of credit are fast and simple to obtain
• You can qualify as a young or new business owner, as long as you have the required assets
• Assets lower the lender’s risk, which generally means you can qualify for lower interest rates
• Utilizing an asset unlocks your ability to borrow more and qualify for higher funding amounts
• As long as you can prove your ownership of the asset, you can receive fast approvals and immediately boost cash flow

ABL: Banks Vs. Marketplaces

Where should you apply for an asset-based loan? There are a few factors you should consider to make the best choice for your small business.

Banks boast lower interest rates but require a lengthy application and turnaround time. They also hold applicants to higher credit scores and sales expectations. You may qualify, but you’ll only be able to consider one option, which may not meet your needs. The wrong asset-based loan could subject your business to years of repaying a loan that ultimately won’t help your business.

Marketplaces, on the other hand, simplify the application process and normally have access to numerous lenders and finance companies. Many are asset-based lenders with a unique focus on certain industries and collateral types. The best marketplaces ensure that it’s easy to match you with all relevant options so that you can select the best for you.

Qualifying for Asset-Based Lending

Wondering how you can qualify for asset-based lending? The process can be easy, but it depends on where you go.

Banks have a long turnaround time and a complicated process, even while your asset will lower its risk. While rates may be slightly lower, you’ll pay for this in extended review processes and potentially lower financing amounts. If you’re not concerned about your opportunity fading away or your competition catching up, though, then this may be a good option.

Marketplaces, on the other hand, have a simpler and easier qualification process that ensures you can review more options faster. Here are National Business Capital’s qualifications.

• $500K in Current Receivables

The lender will approve your company to borrow based on the collateral’s posted value on the balance sheet. The more valuable your asset or assets, the more the lender will feel comfortable approving your business for.

How to Use Asset-Based Loans

When it comes to fast cash for urgent working capital needs, asset-based lending is a simple, fast and easy option. Generally, there are no restrictions on how you can spend these funds.

Fuel Business Growth:

Take the next steps in growing and expanding your business by opening a new location, expanding offerings, and more

Fund Inventory Purchases:

Obtain inventory in bulk quantities to lower costs and drive profits, especially during peak periods

Fill New Orders:

Invest in growth by purchasing the materials you need to fill incoming orders, despite high upfront costs

Cover Expenses:

Stay on top of rising operating costs like rent, insurance and more with an asset-based loan or credit line

Keep Extra Cash on Hand:

Never miss a new, revenue-generating opportunity again with extra cash in your back pocket

Endure Slow Seasons:

Cover expenses like payroll, operating costs, and marketing during slow seasons when revenue is down

You can put your additional working capital toward any expenses that will help your business grow!

Examples: How Industries Use Asset-Based Lending as a Financing Tool

Asset-based lending offers a viable way to grow your business fast, instead of waiting around for working capital to catch up with your needs.

From a very early point, small, medium, and large businesses can all utilize asset-based lending to grow. Here are a few examples of how companies in certain industries have already grown with ABL:

As demand increases, eCommerce companies can use asset-based financing to buy more inventory, increase marketing, and land new customers.

Marketing & Technology:

With more clients on the books, marketing and technology companies can sell agreements to tap into additional cash and fuel growth.

Textile & Shoe:

Fast-growing textile and shoe companies frequently use ABL to purchase supplies and inventory ahead of bulk transactions.

ABL ensures wholesalers have the cash they need for high-ticket transactions that yield substantial returns, especially while getting things off the ground.

Gas & Oil:

While gas and oil sales have sky-high profit margins on the distribution side, purchasing supply can be a cost challenge—which is where asset-based loans often help.

Medical Supply:

Distributors, especially those selling PPE, tend to utilize asset-based lending in order to place bulk orders for inventory at the lowest, most cost-effective rate.

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How To Write A Successful Business Plan For A Loan

Updated: Aug 18, 2022, 12:46pm

A business plan is a document that lays out a company’s strategy and, in some cases, how a business owner plans to use loan funds, investments and capital. It demonstrates that a business is already producing income and has a plan to continue doing so moving forward.

A successful business plan is well-written, realistic, concise and, most importantly, convinces financial institutions that approving your business for a loan is a smart choice.

Here’s what you need to know about each section of a business plan and how to write a plan that will earn a lender’s stamp of approval.

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What Does a Successful Business Plan Include?

A successful business plan outlines your entire business and effectively explains how it makes money and why it’s likely to succeed. This is especially important if you’re trying to get a small business loan .

The content of a business plan should vary from company to company, but there are a few common sections that will help lenders better understand your business and help you qualify for financing.

Executive Summary

An executive summary concisely summarizes your business plan—usually on one page. The goals of this section are to inform the reader about the business as a whole, summarize what is contained in the rest of the document and capture their interest. That said, the best use of this section may depend on the age of your business.

• Startups. Startup owners typically use the executive summary to discuss the business opportunity, their target market and their planned strategy for building the business. The section also may touch on relevant market competition. Startup companies in particular should use the executive summary to build a lender’s confidence in the business.
• Established businesses. Companies that have been in business for several years usually orient their executive summaries around past achievements and growth plans. In this case, the section may begin with the company’s mission statement and provide information about business operations and financials before outlining future goals.

Industry Analysis

The industry analysis section of a business plan defines the business’ industry and mentions current trends—with a focus on risks and opportunities. The section also informs the reader about how the industry works and where the business fits in the industry as a whole.

This section should start by defining the industry, as well as what products and services it provides, and what consumer demand it fulfills. Next, identify the most important influences in the industry. In the case of a bank, this may include applicable government regulations; for a clothing boutique, it may be consumer trends and budget.

The industry analysis should also define the company’s intended niche in the industry.

Market Analysis

The market analysis zooms into the specific market niche mentioned in the previous section. Market analysis aims to detail the segment of the broader market the business is intended to fit within. For example, a fashion brand or boutique may target high-income consumers.

Use this section to explain how the segment differs from the wider industry. In the fashion boutique example, a market analysis may reveal that high-income consumers in the fashion industry pay substantially more for brands that are considered exclusive.

Also, describe the size of your business’ niche and how it fits into the wider industry. This should include mention of how many existing businesses operate in this niche and how they target consumers.

Competitor Analysis

A competitor analysis explains what competitors in your niche do and informs the reader of the current market environment. Start with an overall assessment of your competitors. Then, discuss the most relevant competitors for your niche. When conducting a competitor analysis, ask yourself the following questions:

• Where do your ideal customers currently shop?
• How do these competitors differentiate themselves?
• How are competitor products and services priced?
• Why do customers choose those products or service providers?

Using the example above, many clothing boutiques compete by providing higher quality products or a unique, luxury shopping experience. If your store has a single location, your competitor might be another clothing store with a similar price-point or signature style.

Target Market Segmentation

In the target market segmentation, you’ll identify your business’ target market and describe how you will meet its needs. This section aims to instill confidence in the lender by providing a clear and objective strategy for building revenue.

Begin the section by informing how your products or services meet your shoppers’ needs. Next, explain how consumers can access your products or services—including a brief outline of your marketing strategy and how it is tailored to your target clients. Contrast this to your competitors’ strategy as defined in the previous section. After reading this portion of the business plan, the lender should know exactly how your business intends to compete.

Services or Products Offered

Use this section of the plan to explain what your business offers its ideal customers and to contrast your product and service offering to that of your competitors. Start by defining your product and service offering, including pricing. Also, inform the reader what equipment or materials you need to provide your products and services. For instance, a fashion apparel brand needs access to textile manufacturers.

Marketing Plan and Sales Strategy

Now that the lender understands what you offer, explain how you plan to market it in greater detail. This section outlines how you’ll attract and convince consumers to buy from you. The goal is to provide a flexible and realistic marketing and sales plan that convinces the reader you know how to attract consumers.

The sales strategy section of your business plan also should include the company’s revenue goals and explain how your marketing and sales department will achieve them. Provide in-depth details on the marketing and sales challenges you’ll face and how to overcome them. While this information is always relevant, it’s particularly important to lenders reviewing your loan application as they will want to know how you plan to make money.

Operations Plan

The operations plan details your company’s day-to-day operations. This detail-oriented section should comprehensively explain how your business will operate, beginning with a list of your company’s daily activities.

As a high-end clothing boutique, your daily operations may include:

• A manager reconciling sales receipts and inventory numbers
• Stylists researching future trends and sourcing new inventory
• A marketing team building an online and social media presence

Note: This section is more about your business’s daily processes rather than its organizational structure—which is the next section.

Management Team

Use the management section of your business plan to tell the lender who does what in the company and how they’re compensated. Help the lender better understand the people behind the company by including biographical and background information on the company’s owners and key executives.

The best way to present this information is often with an organizational flowchart. You can also include other information about the company in this section, like your mission statement and values.

Financial Plan

Your financial plan tells a prospective lender two things: how much you plan to spend each year and how much you’ll earn in revenue. This section is the most important for most businesses, as it can make or break a lender’s confidence and willingness to extend credit.

Always include the following documents in the financial section of your business plan:

• Cash flow statements
• Income statements
• Capital expenditure budgets
• Balance sheets

Most lenders ask established businesses for at least three years of financial data, and some may ask for five. Preferably, include as much financial data as possible. If you’re a startup, include estimated costs and projected revenue, and supplement your data with industry averages or financial data from competitors.

Exit Strategy

Your business plan should always include an exit strategy in case things go wrong or you simply decide to close up shop. This may include everything from taking on new partners to selling your business or even declaring bankruptcy. Having an exit strategy is another way to show lenders that you have thought about the risks involved with your business and are prepared for them.

The appendix of a business plan normally contains financial information and other documents the reader may need to gain a comprehensive understanding of the business. Established businesses typically include financial statements and projections, at a minimum. In contrast, a startup could include the research they conducted to make the business plan.

Also consider including relevant resumes, marketing materials, letters of recommendation or references. For ease, your appendix should have a table of contents directing lenders to the most important documents.

What Lenders Look for In a Business Plan

There are five things that lenders typically look at when making business lending decisions: character, capacity, capital, conditions and collateral. By understanding these key considerations, you can draft a business plan that speaks to a lender’s interests and concerns.

A business’ character includes subjective, intangible qualities like whether its owners are perceived as honest, competent or determined. Stated another way, lenders want to know that you are honest and have integrity. These qualities can be critical for evaluating candidates because most lenders don’t want to lend to someone they don’t feel they can trust.

To evaluate the character of you and your business, lenders look at your personal credit history as well as your business’ financial history. Use your business plan to bolster your character by including ample financial records, letters of recommendation and other relevant documents.

Lenders want to know that you have the ability to repay the loan. They evaluate this by looking at your business’ financial history to see how much revenue you have generated in the past and how much profit you have made.

Lenders might also judge your capacity based on your business’ financial projections as well as your personal credit history and household income. Where relevant, lenders look at your management team to see if they have the experience needed to grow your business or keep it on a path toward success.

When reviewing your loan application, lenders read your business plan to see how much money you need to borrow and how you will repay the loan. They also look at your financial statements to see how much cash you have on hand and how much debt you are carrying.

Likewise, lenders often prefer business owners who have made larger personal financial investments in their enterprises. A personal financial investment reveals your commitment to the business and demonstrates you have the resources to pay off a large loan.

Ultimately, a lender’s biggest concern is whether your business can realistically succeed. So, they judge your company’s chances of success using your business plan as well as current market conditions. A good business plan can improve your lender’s confidence by convincing the lender that market conditions and your business strategy increase your odds of success.

In some cases, lenders want to know that you have something of value that they can use to secure the loan. This can be property, equipment, inventory or even receivables. If you don’t have any collateral, lenders may still approve a loan if you have a good credit history and a solid business plan.

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Kiah Treece is a small business owner and personal finance expert with experience in loans, business and personal finance, insurance and real estate. Her focus is on demystifying debt to help individuals and business owners take control of their finances. She has also been featured by Investopedia, Los Angeles Times, Money.com and other financial publications.

Asset Financing

Updated July 13, 2023

What is Asset Financing?

Asset financing refers to borrowing money or getting a loan against your company’s business assets, whether long-term or short-term investments, fixed and current assets, including inventory. In other words, it refers to the pledging of assets to borrow money in a quicker timeframe.

Example of Asset Financing

A classic example is a business wishing to grow/expand its market. Mano Inc., a company engaged in cloth manufacturing, is looking to increase its production based on the high demand for its product.

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In such a scenario, Mano Inc. may finance assets by regularly taking new production machinery on fixed payment plans. It is based on the terms agreed upon between the lender and Mano Inc.

This helps Mano. Inc continues its expansion plans without worrying about the initial investment to purchase new production machinery to fulfill the increased demand.

Types of Asset Financing

Asset financing can categorize in majorly three types:

1. Asset Refinance

Asset Refinancing is when you pledge the company’s assets as collateral for securing a loan. For example, the company may take a loan with balance sheet assets, including all machinery, equipment, accounts receivables, and other assets.

Asset refinancing enables obtaining a loan in a shorter period, as it utilizes the value of the assets being pledged to determine the loan’s value. In this scenario, the business’s profitability and creditworthiness are not required to be verified and thus is a quicker process to get a loan.

2. Hire Purchase

In the case of a hire purchase agreement, there are two parties, one the lender and the other the borrower. In such an arrangement, the lender buys an asset from the market or third party (according to the borrower’s requirements) and then lends it to the borrower for business use.

Here, the borrower makes regular payments to the lender over a mutually decided period. The borrower can purchase the asset at an agreed price (usually very nominal) after making the final payment.

This arrangement is useful to the borrower as he can pay in parts/installments.

A lease can be of 3 types: operating, finance, and equipment.

An operating lease is when an asset is borrowed from the lender for a short to medium timeframe. It is helpful for the business as the payments made are only towards using the asset for the required time period and helps fulfill business needs.

The finance lease has its main object of giving the borrower the rights and obligations of the asset under lease for the duration of the lease. From using an asset to maintaining the asset is the sole responsibility of the borrower.

In the Equipment lease, agreement entrees between the borrower and the lender, allowing the borrower to use the equipment under agreed payment terms for an agreed period of time. At the end of tenure, the borrower can either return or buy the equipment, extend the lease, or go for better equipment.

What are the Minimum and Maximum Amounts that can Raise with Asset Finance?

Although no set numbers are prescribed regarding the amount that can raise with asset financing, countries may keep some specific conditions and restrictions in place.

You may understand that the loan amount can differ from party to party as, ultimately, the asset financing involves transactions between two parties for terms agreed upon mutually.

The loan amount will depend on the pledged asset, the loan granted, and any other terms the parties agree upon.

Why do we use Asset Financing?

Asset financing can secure an asset or a loan against an asset.

When a company goes for asset refinancing to secure an asset, it saves it from shelling out huge amounts to purchase such an asset. The company can easily manage its working capital requirements and make regular payments to secure the asset necessary to run the business.

On the other hand, when the company plans to go for asset financing by way of pledging the asset, it achieves the purpose and requirements of short-term loans and the business’s working capital needs. Considering it is easier to get loans by keeping the assets as collateral and the quick turnaround time to get the loan, it attracts many companies to go for asset financing.

Advantages of Asset Financing

• It saves the hassle of accumulating huge funds for outright buying the assets for a business.
• An affordable option for new and growing businesses
• Offers flexibility as the lender and borrower may mutually decide upon the repayment structure
• Fixed payments over a period of time help business owners in managing their finances
• Offers security – the amount of the loan is roughly equal to the value of the asset, thus keeping both parties safe
• Any adverse credit rating of the borrower may not be an issue
• The profitability of the business is not a concern, and hence even loss-making businesses can easily get loans through this method

Disadvantages of Asset Financing

• It May prove to be expensive if the interest charges and service charges are on the higher side (based on negotiations between the parties)
• You may need to make a down payment/deposit upfront, which may entail having a certain amount of funds upright (based on negotiations between the parties)
• In case of payment default, the lender may seize the asset given as collateral.
• Repairs and Maintenance of the assets can be an additional expense burden
• In the lease model, usually, the lender is the owner of the asset, and in case the asset being recalled or taken from a borrower, it can impact the business of the borrower

Key Takeaways for Asset Financing

Asset financing gives the companies the flexibility to plan for investing in the assets. Also, it helps companies borrow money quicker by pledging their assets, including inventory and accounts receivables.

Considering that the lender can seize the asset in case of default, it gives the lender the security of the loan given.

To summarize the whole discussion in a few words, asset financing helps a company fetch a loan by pledging its assets and thus managing any working capital requirements for the short term.

It is also good for new and growing companies or companies that often have short-term working capital requirements. The loan is taken based on its valuable assets and not on its profitability and creditability.

Recommended Articles

This is a guide to Asset Financing. Here we also discuss the definitions, types, and examples of Asset Financing along with the advantages and disadvantages. You may also have a look at the following articles to learn more –

• Asset Based Lending
• Accounts Receivable Financing
• Acquisition Financing
• Asset Classes

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How to Develop a Small Business Financial Plan

By Andy Marker | April 29, 2022

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Financial planning is critical for any successful small business, but the process can be complicated. To help you get started, we’ve created a step-by-step guide and rounded up top tips from experts.

Included on this page, you’ll find what to include in a financial plan , steps to develop one , and a downloadable starter kit .

What Is a Small Business Financial Plan?

A small business financial plan is an outline of the financial status of your business, including income statements, balance sheets, and cash flow information. A financial plan can help guide a small business toward sustainable growth.

Financial plans can aid in business goal setting and metrics tracking, as well as provide proof of profitable ideas. Craig Hewitt, Founder of Castos , shares that “creating a financial plan will show you if your business ideas are sustainable. A financial plan will show you where your business stands and help you make better decisions about resource allocation. It will also help you plan growth, survive cash flow shortages, and pitch to investors.”

Why Is It Important for a Small Business to Have a Financial Plan?

All small businesses should create a financial plan. This allows you to assess your business’s financial needs, recognize areas of opportunity, and project your growth over time. A strong financial plan is also a bonus for potential investors.

Mark Daoust , the President and CEO of Quiet Light Brokerage, Inc., explains why a financial plan is important for small businesses: “It can sometimes be difficult for business owners to evaluate their own progress, especially when starting a new company. A financial plan can be helpful in showing increased revenues, cash flow growth, and overall profit in quantifiable data. It's very encouraging for small business owners who are often working long hours and dealing with so many stressful decisions to know that they are on the right track.”

To learn more about other important considerations for a small business, peruse our list of free startup plan, budget, and cost templates .

What Does a Small Business Financial Plan Include?

All small businesses should include an income statement, a balance sheet, and a cash flow statement in their financial plan. You may also include other documents, such as personnel plans, break-even points, and sales forecasts, depending on the business and industry.

• Balance Sheet: A balance sheet determines the difference between your liabilities and assets to determine your equity. “A balance sheet is a snapshot of a business’s financial position at a particular moment in time,” says Yüzbaşıoğlu. “It adds up everything your business owns and subtracts all debts — the difference reflects the net worth of the business, also referred to as equity .” Yüzbaşıoğlu explains that this statement consists of three parts: assets, liabilities, and equity. “Assets include your money in the bank, accounts receivable, inventories, and more. Liabilities can include your accounts payables, credit card balances, and loan repayments, for example. Equity for most small businesses is just the owner’s equity, but it could also include investors’ shares, retained earnings, or stock proceeds,” he says.
• Cash Flow Statement: A cash flow statement shows where the money is coming from and where it is going. For existing businesses, this will include bank statements that list deposits and expenditures. A new business may not have much cash flow information, but it can include all startup costs and funding sources. “A cash flow statement shows how much cash is generated and used during a given period of time. It documents all the money flowing in and out of your business,” explains Yüzbaşıoğlu.
• Break-Even Analysis: A break-even analysis is a projection of how long it will take you to recoup your investments, such as expenses from startup costs or ongoing projects. In order to perform this analysis, Yüzbaşıoğlu explains, “You need to know the difference between fixed costs and variable costs. Fixed costs are the expenses that stay the same, regardless of how much you sell or don't sell. For example, expenses such as rent, wages, and accounting fees are typically fixed. Variable costs are the expenses that change in accordance with production or sales volume. “In other words, [a break-even analysis] determines the units of products or services you need to sell at least to cover your production costs. Generally, to calculate the break-even point in business, divide fixed costs by the gross profit margin. This produces a dollar figure that a company needs to break even,” Yüzbaşıoğlu shares.
• Personnel Plan: A personnel plan is an outline of various positions or departments that states what they do, why they are necessary, and how much they cost. This document is generally more useful for large businesses, or those that find themselves spending a large percentage of their budget on labor.
• Sales Forecast: A sales forecast can help determine how many sales and how much money you expect to make in a given time period. To learn more about various methods of predicting these figures, check out our guide to sales forecasting .

How to Write a Small Business Financial Plan

Writing a financial plan begins with collecting financial information from your small business. Create income statements, balance sheets, and cash flow statements, and any other documents you need using that information. Then share those documents with relevant stakeholders.

“Creating a financial plan is key to any business and essential for success: It provides protection and an opportunity to grow,” says Yüzbaşıoğlu. “You can use [the financial plan] to make better-informed decisions about things like resource allocation on future projects and to help shape the success of your company.”

1. Create a Plan

Create a strategic business plan that includes your business strategy and goals, and define their financial impact. Your financial plan will inform decisions for every aspect of your business, so it is important to know what is important and what is at stake.

2. Gather Financial Information

Collect all of the available financial information about your business. Organize bank statements, loan information, sales numbers, inventory costs, payroll information, and any other income and expenses your business has incurred. If you have not already started to do so, regularly record all of this information and store it in an easily accessible place.

3. Create an Income Statement

Your income statement should display revenue, expenses, and profit for a given time period. Your revenue minus your expenses equals your profit or loss. Many businesses create a new statement yearly or quarterly, but small businesses with less cash flow may benefit from creating statements for shorter time frames.

4. Create a Balance Sheet

Your balance sheet is a snapshot of your business’s financial status at a particular moment in time. You should update it on the same schedule as your income statement. To determine your equity, calculate all of your assets minus your liabilities.

5. Create a Cash Flow Statement

As mentioned above, the cash flow statement shows all past and projected cash flow for your business. “Your cash flow statement needs to cover three sections: operating activities, investing activities, and financing activities,” suggests Hewitt. “Operating activities are the movement of cash from the sale or purchase of goods or services. Investing activities are the sale or purchase of long-term assets. Financing activities are transactions with creditors and investments.”

6. Create Other Documents as Needed

Depending on the age, size, and industry of your business, you may find it useful to include these other documents in your financial plan as well.

• Sales Forecast: Your sales forecast should reference sales numbers from your past to estimate sales numbers for your future. Sales forecasts may be more useful for established companies with historical numbers to compare to, but small businesses can use forecasts to set goals and break records month over month. “To make future financial projections, start with a sales forecast,” says Yüzbaşıoğlu. “Project your sales over the course of 12 months. After projecting sales, calculate your cost of sales (also called cost of goods or direct costs). This will let you calculate gross margin. Gross margin is sales less the cost of sales, and it's a useful number for comparing with different standard industry ratios.”

7. Save the Plan for Reference and Share as Needed

The most important part of a financial plan is sharing it with stakeholders. You can also use much of the same information in your financial plan to create a budget for your small business.

Additionally, be sure to conduct regular reviews, as things will inevitably change. “My best tip for small businesses when creating a financial plan is to schedule reviews. Once you have your plan in place, it is essential that you review it often and compare how well the strategy fits with the actual monthly expenses. This will help you adjust your plan accordingly and prepare for the year ahead,” suggests Janet Patterson, Loan and Finance Expert at  Highway Title Loans.

Small Business Financial Plan Example

Download Small Business Financial Plan Example Microsoft Excel | Google Sheets

Here is an example of what a completed small business financial plan dashboard might look like. Once you have completed your income statement, balance sheet, and cash flow statements, use a template to create visual graphs to display the information to make it easier to read and share. In this example, this small business plots its income and cash flow statements quarterly, but you may find it valuable to update yours more often.

Small Business Financial Plan Starter Kit

Download Small Business Financial Plan Starter Kit

We’ve created this small business financial plan starter kit to help you get organized and complete your financial plan. In this kit, you will find a fully customizable income statement template, a balance sheet template, a cash flow statement template, and a dashboard template to display results. We have also included templates for break-even analysis, a personnel plan, and sales forecasts to meet your ongoing financial planning needs.

Small Business Income Statement Template 

Download Small Business Income Statement Template Microsoft Excel | Google Sheets

Use this small business income statement template to input your income information and track your growth over time. This template is filled to track by the year, but you can also track by months or quarters. The template is fully customizable to suit your business needs.

Small Business Balance Sheet Template 

Download Small Business Balance Sheet Template Microsoft Excel | Google Sheets

This customizable balance sheet template was created with small businesses in mind. Use it to create a snapshot of your company’s assets, liabilities, and equity quarter over quarter. 

Small Business Cash Flow Statement Template 

Download Small Business Cash Flow Template Microsoft Excel | Google Sheets

Use this customizable cash flow statement template to stay organized when documenting your cash flow. Note the time frame and input all of your financial data in the appropriate cell. With this information, the template will automatically generate your total cash payments, net cash change, and ending cash position.

Break-Even Analysis Template 

Download Break-Even Analysis Template Microsoft Excel | Google Sheets

This powerful template can help you determine the point at which you will break even on product investment. Input the sale price of the product, as well as its various associated costs, and this template will display the number of units needed to break even on your initial costs.

Personnel Plan Template  

Download Personnel Plan Template Microsoft Excel | Google Sheets

Use this simple personnel plan template to help organize and define the monetary cost of the various roles or departments within your company. This template will generate a labor cost total that you can use to compare roles and determine whether you need to make cuts or identify areas for growth.

Sales Forecast Template

Download Sales Forecast Template Microsoft Excel | Google Sheets

Use this customizable template to forecast your sales month over month and determine the percentage changes. You can use this template to set goals and track sales history as well.

Small Business Financial Plan Dashboard Template

Download Small Business Financial Plan Dashboard Template Microsoft Excel | Google Sheets

This dashboard template provides a visual example of a small business financial plan. It presents the information from your income statement, balance sheet, and cash flow statement in a graphical form that is easy to read and share.

Tips for Completing a Financial Plan for a Small Business

You can simplify the development of your small business financial plan in many ways, from outlining your goals to considering where you may need help. We’ve outlined a few tips from our experts below:

• Outline Your Business Goals: Before you create a financial plan, outline your business goals. This will help you determine where money is being well spent to achieve those goals and where it may not be. “Before applying for financing or investment, list the expected business goals for the next three to five years. You can ask a certified public accountant for help in this regard,” says Thé. The U.S. Small Business Administration or a local small business development center can also help you to understand the local market and important factors for business success. For more help, check out our quick how-to guide on writing a business plan .
• Make Sure You Have the Right Permits and Insurance: One of the best ways to keep your financial plan on track is to anticipate large expenditures. Double- and triple-check that you have the permits and insurances you need so that you do not incur any fines or surprise expenses down the line. “If you own your own business, you're no longer able to count on your employer for your insurance needs. It's important to have a plan for how you're going to pay for this additional expense and make sure that you know what specific insurance you need to cover your business,” suggests Daost.
• Separate Personal Goals from Business Goals: Be as unbiased as possible when creating and laying out your business’s financial goals. Your financial and prestige goals as a business owner may be loftier than what your business can currently achieve in the present. Inflating sales forecasts or income numbers will only come back to bite you in the end.
• Consider Hiring Help: You don’t know what you don’t know, but fortunately, many financial experts are ready to help you. “Hiring financial advisors can help you make sound financial decisions for your business and create a financial roadmap to follow. Many businesses fail in the first few years due to poor planning, which leads to costly mistakes. Having a financial advisor can help keep your business alive, make a profit, and thrive,” says Hewitt.
• Include Less Obvious Expenses: No income or expense is too small to consider — it all matters when you are creating your financial plan. “I wish I had known that you’re supposed to incorporate anticipated internal hidden expenses in the plan as well,” Patterson shares. “I formulated my first financial plan myself and didn’t have enough knowledge back then. Hence, I missed out on essential expenses, like office maintenance, that are less common.”

Do Small Business Owners Need a Financial Planner?

Not all small business owners need a designated financial planner, but you should understand the documents and information that make up a financial plan. If you do not hire an advisor, you must be informed about your own finances.

Small business owners tend to wear many hats, but Powell says, “it depends on the organization of the owner and their experience with the financial side of operating businesses.” Hiring a financial advisor can take some tasks off your plate and save you time to focus on the many other details that need your attention. Financial planners are experts in their field and may have more intimate knowledge of market trends and changing tax information that can end up saving you money in the long run. 

Yüzbaşıoğlu adds, “Small business owners can greatly benefit from working with a financial advisor. A successful small business often requires more than just the skills of an entrepreneur; a financial advisor can help the company effectively manage risks and maximize opportunities.”

For more examples of the tasks a financial planner might be able to help with, check through our list of free financial planning templates .

Drive Small Business Success with Financial Planning in Smartsheet

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Asset Financing – Meaning, Types, Risk Associated and Differences

• What is Asset Financing?

Asset financing refers to the process of obtaining funds for purchasing or acquiring assets, such as equipment, machinery, vehicles, or real estate. Just as business owners provide equity in their business to the lenders for obtaining funds through equity financing , in asset financing, the asset itself acts as collateral for the financing.

It is a source of finance in which the business borrows money for purchasing assets. The payment obligation and the ownership rights of the borrower change depending on the method of asset financing.

Difference between Asset Financing and Loan

Types of asset financing, resolve liquidity crunch issues, tax benefits, risk of technology obsolescence, restrict further borrowings.

Asset financing is a type of loan that specifically involves the use of an asset as collateral to acquire that asset, while traditional loans are not tied to a specific asset. Instead, the borrower receives funds from the lender and is free to use them as they see fit.

Under asset financing, the lending is not in the form of a conventional loan where the lender gives one single payment to the borrower. Instead, the payment is spread over a period of time. This is a useful way to acquire assets without tying up large amounts of capital.

Also Read: Sources of Debt Financing

The following are the five types of asset financing:

• Hire Purchase
• Operating Lease
• Finance Lease
• Equipment Lease
• Asset Refinancing

Advantages of Asset Financing

The following are the various advantages and reasons why businesses prefer asset financing:

With technology and innovations growing in every field, businesses constantly need money to purchase new assets. Asset financing allows businesses to acquire the assets they need to operate or grow their business without tying up large amounts of their own capital or cash reserves.

Capital expenditure for buying costly assets can lead to cash flow problems resulting in a shortage of working capital. A working capital crunch can hamper the regular functioning of the business. This is where the role of asset financing becomes important.

Asset financing also offers tax benefits for businesses, as the interest payments on the loan are tax-deductible.

Disadvantages of Asset Financing

The following are the disadvantages:

Banks and other financial institutions act as lenders in this financing. This is relatively safer for banks and other financial institutions than giving a conventional loan to borrowers. In this financing, the lending institutions’ finance is secured by the value of the asset financed. Moreover, the finance value is even secured through collateral security in most cases. If the borrower fails to repay the borrowed money, the lender can seize the asset and sell the same in the open market to recover the money.

But the major concern for financial institutions is that when the asset is sold in the secondary market after its seizure, the risk of a decline in the asset’s value always looms over its head. To overcome the risk, financial institutions finance the asset considering that the contingent claim is going to arise on the asset, and accordingly, they frame the lending terms.

Also Read: Financing Policy

Since the asset is already acting as collateral, it cannot be used as security for further borrowings.

Asset financing is a boon to the business. If a business is willing to expand, it is a perfect solution for its financial needs. Companies now don’t need massive cash in hand before purchasing any new asset; instead, they can just fund it via asset financing. This is beneficial for the borrowers and the financial institutions who lend the money, as they get regular interest, and their risk is covered with assets kept as collateral security.

RELATED POSTS

• Asset Refinance – Meaning, How it Works, Benefits, and Drawbacks
• Lease Finance vs. Installment Sale
• Difference between Lease Financing Vs Hire Purchase
• Financing Strategies
• Finance / Capital Lease
• Working Capital vs. Term Loan – All You Need to Know

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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How to Write the Financial Section of a Business Plan

An outline of your company's growth strategy is essential to a business plan, but it just isn't complete without the numbers to back it up. here's some advice on how to include things like a sales forecast, expense budget, and cash-flow statement..

A business plan is all conceptual until you start filling in the numbers and terms. The sections about your marketing plan and strategy are interesting to read, but they don't mean a thing if you can't justify your business with good figures on the bottom line. You do this in a distinct section of your business plan for financial forecasts and statements. The financial section of a business plan is one of the most essential components of the plan, as you will need it if you have any hope of winning over investors or obtaining a bank loan. Even if you don't need financing, you should compile a financial forecast in order to simply be successful in steering your business. "This is what will tell you whether the business will be viable or whether you are wasting your time and/or money," says Linda Pinson, author of Automate Your Business Plan for Windows  (Out of Your Mind 2008) and Anatomy of a Business Plan (Out of Your Mind 2008), who runs a publishing and software business Out of Your Mind and Into the Marketplace . "In many instances, it will tell you that you should not be going into this business." The following will cover what the financial section of a business plan is, what it should include, and how you should use it to not only win financing but to better manage your business.

Dig Deeper: Generating an Accurate Sales Forecast

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How to Write the Financial Section of a Business Plan: The Purpose of the Financial Section Let's start by explaining what the financial section of a business plan is not. Realize that the financial section is not the same as accounting. Many people get confused about this because the financial projections that you include--profit and loss, balance sheet, and cash flow--look similar to accounting statements your business generates. But accounting looks back in time, starting today and taking a historical view. Business planning or forecasting is a forward-looking view, starting today and going into the future. "You don't do financials in a business plan the same way you calculate the details in your accounting reports," says Tim Berry, president and founder of Palo Alto Software, who blogs at Bplans.com and is writing a book, The Plan-As-You-Go Business Plan. "It's not tax reporting. It's an elaborate educated guess." What this means, says Berry, is that you summarize and aggregate more than you might with accounting, which deals more in detail. "You don't have to imagine all future asset purchases with hypothetical dates and hypothetical depreciation schedules to estimate future depreciation," he says. "You can just guess based on past results. And you don't spend a lot of time on minute details in a financial forecast that depends on an educated guess for sales." The purpose of the financial section of a business plan is two-fold. You're going to need it if you are seeking investment from venture capitalists, angel investors, or even smart family members. They are going to want to see numbers that say your business will grow--and quickly--and that there is an exit strategy for them on the horizon, during which they can make a profit. Any bank or lender will also ask to see these numbers as well to make sure you can repay your loan. But the most important reason to compile this financial forecast is for your own benefit, so you understand how you project your business will do. "This is an ongoing, living document. It should be a guide to running your business," Pinson says. "And at any particular time you feel you need funding or financing, then you are prepared to go with your documents." If there is a rule of thumb when filling in the numbers in the financial section of your business plan, it's this: Be realistic. "There is a tremendous problem with the hockey-stick forecast" that projects growth as steady until it shoots up like the end of a hockey stick, Berry says. "They really aren't credible." Berry, who acts as an angel investor with the Willamette Angel Conference, says that while a startling growth trajectory is something that would-be investors would love to see, it's most often not a believable growth forecast. "Everyone wants to get involved in the next Google or Twitter, but every plan seems to have this hockey stick forecast," he says. "Sales are going along flat, but six months from now there is a huge turn and everything gets amazing, assuming they get the investors' money."  The way you come up a credible financial section for your business plan is to demonstrate that it's realistic. One way, Berry says, is to break the figures into components, by sales channel or target market segment, and provide realistic estimates for sales and revenue. "It's not exactly data, because you're still guessing the future. But if you break the guess into component guesses and look at each one individually, it somehow feels better," Berry says. "Nobody wins by overly optimistic or overly pessimistic forecasts."

Dig Deeper: What Angel Investors Look For

How to Write the Financial Section of a Business Plan: The Components of a Financial Section

A financial forecast isn't necessarily compiled in sequence. And you most likely won't present it in the final document in the same sequence you compile the figures and documents. Berry says that it's typical to start in one place and jump back and forth. For example, what you see in the cash-flow plan might mean going back to change estimates for sales and expenses.  Still, he says that it's easier to explain in sequence, as long as you understand that you don't start at step one and go to step six without looking back--a lot--in between.

• Start with a sales forecast. Set up a spreadsheet projecting your sales over the course of three years. Set up different sections for different lines of sales and columns for every month for the first year and either on a monthly or quarterly basis for the second and third years. "Ideally you want to project in spreadsheet blocks that include one block for unit sales, one block for pricing, a third block that multiplies units times price to calculate sales, a fourth block that has unit costs, and a fifth that multiplies units times unit cost to calculate cost of sales (also called COGS or direct costs)," Berry says. "Why do you want cost of sales in a sales forecast? Because you want to calculate gross margin. Gross margin is sales less cost of sales, and it's a useful number for comparing with different standard industry ratios." If it's a new product or a new line of business, you have to make an educated guess. The best way to do that, Berry says, is to look at past results.
• Create an expenses budget. You're going to need to understand how much it's going to cost you to actually make the sales you have forecast. Berry likes to differentiate between fixed costs (i.e., rent and payroll) and variable costs (i.e., most advertising and promotional expenses), because it's a good thing for a business to know. "Lower fixed costs mean less risk, which might be theoretical in business schools but are very concrete when you have rent and payroll checks to sign," Berry says. "Most of your variable costs are in those direct costs that belong in your sales forecast, but there are also some variable expenses, like ads and rebates and such." Once again, this is a forecast, not accounting, and you're going to have to estimate things like interest and taxes. Berry recommends you go with simple math. He says multiply estimated profits times your best-guess tax percentage rate to estimate taxes. And then multiply your estimated debts balance times an estimated interest rate to estimate interest.
• Develop a cash-flow statement. This is the statement that shows physical dollars moving in and out of the business. "Cash flow is king," Pinson says. You base this partly on your sales forecasts, balance sheet items, and other assumptions. If you are operating an existing business, you should have historical documents, such as profit and loss statements and balance sheets from years past to base these forecasts on. If you are starting a new business and do not have these historical financial statements, you start by projecting a cash-flow statement broken down into 12 months. Pinson says that it's important to understand when compiling this cash-flow projection that you need to choose a realistic ratio for how many of your invoices will be paid in cash, 30 days, 60 days, 90 days and so on. You don't want to be surprised that you only collect 80 percent of your invoices in the first 30 days when you are counting on 100 percent to pay your expenses, she says. Some business planning software programs will have these formulas built in to help you make these projections.
• Income projections. This is your pro forma profit and loss statement, detailing forecasts for your business for the coming three years. Use the numbers that you put in your sales forecast, expense projections, and cash flow statement. "Sales, lest cost of sales, is gross margin," Berry says. "Gross margin, less expenses, interest, and taxes, is net profit."
• Deal with assets and liabilities. You also need a projected balance sheet. You have to deal with assets and liabilities that aren't in the profits and loss statement and project the net worth of your business at the end of the fiscal year. Some of those are obvious and affect you at only the beginning, like startup assets. A lot are not obvious. "Interest is in the profit and loss, but repayment of principle isn't," Berry says. "Taking out a loan, giving out a loan, and inventory show up only in assets--until you pay for them." So the way to compile this is to start with assets, and estimate what you'll have on hand, month by month for cash, accounts receivable (money owed to you), inventory if you have it, and substantial assets like land, buildings, and equipment. Then figure out what you have as liabilities--meaning debts. That's money you owe because you haven't paid bills (which is called accounts payable) and the debts you have because of outstanding loans.
• Breakeven analysis. The breakeven point, Pinson says, is when your business's expenses match your sales or service volume. The three-year income projection will enable you to undertake this analysis. "If your business is viable, at a certain period of time your overall revenue will exceed your overall expenses, including interest." This is an important analysis for potential investors, who want to know that they are investing in a fast-growing business with an exit strategy.

Dig Deeper: How to Price Business Services

How to Write the Financial Section of a Business Plan: How to Use the Financial Section One of the biggest mistakes business people make is to look at their business plan, and particularly the financial section, only once a year. "I like to quote former President Dwight D. Eisenhower," says Berry. "'The plan is useless, but planning is essential.' What people do wrong is focus on the plan, and once the plan is done, it's forgotten. It's really a shame, because they could have used it as a tool for managing the company." In fact, Berry recommends that business executives sit down with the business plan once a month and fill in the actual numbers in the profit and loss statement and compare those numbers with projections. And then use those comparisons to revise projections in the future. Pinson also recommends that you undertake a financial statement analysis to develop a study of relationships and compare items in your financial statements, compare financial statements over time, and even compare your statements to those of other businesses. Part of this is a ratio analysis. She recommends you do some homework and find out some of the prevailing ratios used in your industry for liquidity analysis, profitability analysis, and debt and compare those standard ratios with your own. "This is all for your benefit," she says. "That's what financial statements are for. You should be utilizing your financial statements to measure your business against what you did in prior years or to measure your business against another business like yours."  If you are using your business plan to attract investment or get a loan, you may also include a business financial history as part of the financial section. This is a summary of your business from its start to the present. Sometimes a bank might have a section like this on a loan application. If you are seeking a loan, you may need to add supplementary documents to the financial section, such as the owner's financial statements, listing assets and liabilities. All of the various calculations you need to assemble the financial section of a business plan are a good reason to look for business planning software, so you can have this on your computer and make sure you get this right. Software programs also let you use some of your projections in the financial section to create pie charts or bar graphs that you can use elsewhere in your business plan to highlight your financials, your sales history, or your projected income over three years. "It's a pretty well-known fact that if you are going to seek equity investment from venture capitalists or angel investors," Pinson says, "they do like visuals."

Dig Deeper: How to Protect Your Margins in a Downturn

Related Links: Making It All Add Up: The Financial Section of a Business Plan One of the major benefits of creating a business plan is that it forces entrepreneurs to confront their company's finances squarely. Persuasive Projections You can avoid some of the most common mistakes by following this list of dos and don'ts. Making Your Financials Add Up No business plan is complete until it contains a set of financial projections that are not only inspiring but also logical and defensible. How many years should my financial projections cover for a new business? Some guidelines on what to include. Recommended Resources: Bplans.com More than 100 free sample business plans, plus articles, tips, and tools for developing your plan. Planning, Startups, Stories: Basic Business Numbers An online video in author Tim Berry's blog, outlining what you really need to know about basic business numbers. Out of Your Mind and Into the Marketplace Linda Pinson's business selling books and software for business planning. Palo Alto Software Business-planning tools and information from the maker of the Business Plan Pro software. U.S. Small Business Administration Government-sponsored website aiding small and midsize businesses. Financial Statement Section of a Business Plan for Start-Ups A guide to writing the financial section of a business plan developed by SCORE of northeastern Massachusetts.

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• Creating a Small Business Financial Plan

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on September 02, 2023

Are You Retirement Ready?

Table of contents, financial plan overview.

A financial plan is a comprehensive document that charts a business's monetary objectives and the strategies to achieve them. It encapsulates everything from budgeting and forecasting to investments and resource allocation.

For small businesses, a solid financial plan provides direction, helping them navigate economic challenges, capitalize on opportunities, and ensure sustainable growth.

The strength of a financial plan lies in its ability to offer a clear roadmap for businesses.

Especially for small businesses that may not have a vast reserve of resources, prioritizing financial goals and understanding where every dollar goes can be the difference between growth and stagnation.

It lends clarity, ensures informed decision-making, and sets the stage for profitability and success.

Understanding the Basics of Financial Planning for Small Businesses

Role of financial planning in business success.

Financial planning is the backbone of any successful business endeavor. It serves as a compass, guiding businesses toward profitability, stability, and growth.

With proper financial planning, businesses can anticipate potential cash shortfalls, make informed investment decisions, and ensure they have the capital needed to seize new opportunities.

For small businesses, in particular, tight financial planning can mean the difference between thriving and shuttering. Given the limited resources, it's vital to maximize every dollar and anticipate financial challenges.

Through diligent planning, small businesses can position themselves competitively, adapt to market changes, and drive consistent growth.

Core Components of a Financial Plan for Small Businesses

Every financial plan comprises several core components that, together, provide a holistic view of a business's financial health and direction. These include setting clear objectives, estimating costs , preparing financial statements , and considering sources of financing.

Each component plays a pivotal role in ensuring a thorough and actionable financial strategy .

For small businesses, these components often need a more granular approach. Given the scale of operations, even minor financial missteps can have significant repercussions.

As such, it's essential to tailor each component, ensuring they address specific challenges and opportunities that small businesses face, from initial startup costs to revenue forecasting and budgetary constraints.

Setting Clear Small Business Financial Objectives

Identifying business's short-term and long-term financial goals.

Every business venture starts with a vision. Translating this vision into actionable financial goals is the essence of effective planning.

Short-term goals could range from securing initial funding and achieving a set monthly revenue to covering startup costs. These targets, usually spanning a year or less, set the immediate direction for the business.

On the other hand, long-term financial goals delve into the broader horizon. They might encompass aspirations like expanding to new locations, diversifying product lines, or achieving a specific market share within a decade.

By segmenting goals into short-term and long-term, businesses can craft a step-by-step strategy, making the larger vision more attainable and manageable.

Understanding the Difference Between Profitability and Cash Flow

Profitability and cash flow, while closely linked, are distinct concepts in the financial realm. Profitability pertains to the ability of a business to generate a surplus after deducting all expenses.

It's a metric of success and indicates the viability of a business model . Simply put, it answers whether a business is making more than it spends.

In contrast, cash flow represents the inflow and outflow of cash within a business. A company might be profitable on paper yet struggle with cash flow if, for instance, clients delay payments or unexpected expenses arise.

For small businesses, maintaining positive cash flow is paramount. It ensures that they can cover operational costs, pay employees, and reinvest in growth, even if they're awaiting payments or navigating financial hiccups.

Estimating Small Business Startup Costs (for New Businesses)

Fixed vs variable costs.

When embarking on a new business venture, understanding costs is paramount. Fixed costs remain consistent regardless of production levels. They include expenses like rent, salaries, and insurance . These are predictable outlays that don't fluctuate with business performance.

Variable costs , conversely, change in direct proportion to production or business activity. Think of costs associated with materials for manufacturing or commission for sales .

For a startup, delineating between fixed and variable costs aids in crafting a more dynamic budget, allowing for adaptability as the business scales and evolves.

One-Time Expenditures vs Ongoing Expenses

Startups often grapple with numerous upfront costs. From purchasing equipment and setting up a workspace to initial marketing campaigns, these one-time expenditures lay the foundation for business operations.

They differ from ongoing expenses like utility bills, raw materials, or employee wages that recur monthly or annually.

For a small business owner, distinguishing between these costs is critical. One-time expenditures often demand a larger chunk of initial capital, while ongoing expenses shape the monthly and annual budget.

By categorizing them separately, businesses can strategize funding needs more effectively, ensuring they're equipped to meet both immediate and recurrent financial obligations.

Funding Sources for Small Businesses

Personal savings.

This is often the most straightforward way to fund a startup. Entrepreneurs tap into their personal savings accounts to jumpstart their business.

While this method has the benefit of not incurring debt or diluting company ownership, it intertwines the individual's personal financial security with the business's fate.

The entrepreneur must be prepared for potential losses, and there's the evident psychological strain of putting one's hard-earned money on the line.

Loans can be sourced from various institutions, from traditional banks to credit unions . They offer a substantial sum of money that can be paid back over time, usually with interest .

The main advantage of taking a loan is that the entrepreneur retains full ownership and control of the business.

However, there's the obligation of monthly repayments, which can strain a business's cash flow, especially in its early days. Additionally, securing a loan often requires collateral and a sound credit history.

Investors, including angel investors and venture capitalists , offer capital in exchange for equity or a stake in the company.

Angel investors are typically high-net-worth individuals who provide funding in the initial stages, while venture capitalists come in when there's proven business potential, often injecting larger sums. The advantage is substantial funding without the immediate pressure of repayments.

However, in exchange for their investment, they often seek a say in business decisions, which might mean compromising on some aspects of the original business vision.

Grants are essentially 'free money' often provided by government programs, non-profit organizations, or corporations to promote innovation and support businesses in specific sectors.

The primary advantage of grants is that they don't need to be repaid, nor do they dilute company ownership. However, they can be highly competitive and might come with stipulations on how the funds should be used.

Moreover, the application process can be lengthy and requires showcasing the business's potential or alignment with the specific goals or missions of the granting institution.

Preparing Key Financial Statements for Small Businesses

Income statement (profit & loss).

An Income Statement , often termed as the Profit & Loss statement , showcases a business's financial performance over a specific time frame. It details revenues , expenses, and ultimately, profits or losses.

By analyzing this statement, business owners can pinpoint revenue drivers, identify exorbitant costs, and understand the net result of their operations.

For small businesses, this document is instrumental in making informed decisions. For instance, if a certain product line is consistently unprofitable, it might be prudent to discontinue it. Conversely, if another segment is thriving, it might warrant further investment.

The Income Statement, thus, serves as a financial mirror, reflecting the outcomes of business strategies and decisions.

Balance Sheet

The Balance Sheet offers a snapshot of a company's assets , liabilities , and equity at a specific point in time.

Assets include everything the business owns, from physical items like equipment to intangible assets like patents .

Liabilities, on the other hand, encompass what the company owes, be it bank loans or unpaid bills.

Equity represents the owner's stake in the business, calculated as assets minus liabilities.

This statement is crucial for small businesses as it offers insights into their financial health. A robust asset base, minimal liabilities, and growing equity signify a thriving enterprise.

In contrast, mounting liabilities or dwindling assets could be red flags, signaling the need for intervention and strategy recalibration.

Cash Flow Statement

While the Income Statement reveals profitability, the Cash Flow Statement tracks the actual movement of money.

It categorizes cash flows into operating (day-to-day business), investing (buying/selling assets), and financing (loans or equity transactions) activities. This statement unveils the liquidity of a business, indicating whether it has sufficient cash to meet immediate obligations.

For small businesses, maintaining positive cash flow is often more vital than showcasing profitability.

After all, a business might be profitable on paper yet struggle if clients delay payments or unforeseen expenses emerge.

By regularly reviewing the Cash Flow Statement, small business owners can anticipate cash crunches and strategize accordingly, ensuring seamless operations irrespective of revenue cycles.

Small Business Budgeting and Expense Management

Importance of budgeting for a small business.

Budgeting is the financial blueprint for any business, detailing anticipated revenues and expenses for a forthcoming period. It's a proactive approach, enabling businesses to allocate resources efficiently, plan for investments, and prepare for potential financial challenges.

For small businesses, a meticulous budget is often the linchpin of stability, ensuring they operate within their means and avoid financial pitfalls.

Having a well-defined budget also fosters discipline. It curtails frivolous spending, emphasizes cost-efficiency, and sets clear financial boundaries.

For small businesses, where every dollar counts, a stringent budget is the gateway to financial prudence, ensuring that funds are utilized judiciously, fostering growth, and minimizing wastage.

Strategies for Reducing Costs and Optimizing Expenses

Bulk purchasing.

When businesses buy supplies in large quantities, they often benefit from discounts due to economies of scale . This can significantly reduce per-unit costs.

However, while bulk purchasing leads to immediate savings, businesses must ensure they have adequate storage and that the products won't expire or become obsolete before they're used.

Renegotiating Vendor Contracts

Regularly reviewing and renegotiating contracts with suppliers or service providers can lead to better terms and lower costs. This might involve exploring volume discounts, longer payment terms, or even bartering services.

Building strong relationships with vendors often paves the way for such negotiations.

Adopting Energy-Saving Measures

Simple changes, like switching to LED lighting or investing in energy-efficient appliances, can lead to long-term savings in utility bills. Moreover, energy conservation not only reduces costs but also minimizes the environmental footprint, which can enhance the business's reputation.

Embracing Technology

Modern software and technology can streamline business processes. Automation tools can handle repetitive tasks, reducing labor costs.

Meanwhile, data analytics tools can provide insights into customer preferences and behavior, ensuring that marketing budgets are used effectively and target the right audience.

Streamlining Operations

Regularly reviewing and refining business processes can eliminate redundancies and improve efficiency. This might mean merging roles, cutting down on unnecessary meetings, or simplifying supply chains. A leaner operation often translates to reduced expenses.

Outsourcing Non-core Tasks

Instead of maintaining an in-house team for every function, businesses can outsource tasks that aren't central to their operations.

For instance, functions like accounting , IT support, or digital marketing can be outsourced to specialized agencies, often leading to cost savings and access to expert skills.

Cultivating a Culture of Frugality

Encouraging employees to adopt a cost-conscious mindset can lead to collective savings. This can be fostered through incentives, regular training, or even simple practices like recycling and reusing office supplies.

When everyone in the organization is attuned to the importance of cost savings, the cumulative effect can be substantial.

Forecasting Small Business Revenue and Cash Flow

Techniques for predicting future sales in a small business, past sales data analysis.

Historical sales data is a foundational element in any forecasting effort. By reviewing previous sales figures, businesses can identify patterns, understand seasonal fluctuations, and recognize the effects of past initiatives.

This information offers a baseline upon which to build future projections, accounting for known recurring variables in the business cycle .

Market Research

Understanding the larger market dynamics is crucial for accurate forecasting. This involves tracking industry trends, monitoring shifts in consumer behavior, and being aware of potential market disruptions.

For instance, a sudden technological advancement can change consumer preferences or regulatory changes might impact an industry.

Local Trend Analysis

For small businesses, localized insights can be especially impactful. Observing local competitors, understanding regional consumer preferences, or noting shifts in the local economy can offer precise data points.

These granular details, when integrated into a larger forecasting model, can enhance prediction accuracy.

Customer Feedback

Direct feedback from customers is an invaluable source of insights. Surveys, focus groups, or even informal chats can reveal customer sentiments, preferences, and potential future purchasing behavior.

For instance, if a majority of loyal customers express interest in a new product or service, it can be indicative of future sales potential.

Moving Averages

This technique involves analyzing a series of data points (like monthly sales) by creating averages from different subsets of the full data set.

For yearly forecasting, a 12-month moving average can be used to smooth out short-term fluctuations and highlight longer-term trends or cycles.

Regression Analysis

Regression analysis is a statistical tool used to identify relationships between variables. In sales forecasting, it can help understand how different factors (like marketing spend, seasonal variations, or competitor actions) relate to sales figures.

Once these relationships are understood, businesses can predict future sales based on planned actions or expected external events.

Understanding the Cash Cycle of Business

The cash cycle encompasses the time it takes for a business to convert resource investments, often in the form of inventory, back into cash.

This involves the processes of purchasing inventory, selling it, and subsequently collecting payment. A shorter cycle implies quicker cash turnarounds, which are vital for liquidity.

For small businesses, a firm grasp of the cash cycle can aid in managing cash flow more effectively.

By identifying bottlenecks or delays, businesses can strategize to expedite processes. This might involve renegotiating payment terms with suppliers, offering discounts for prompt customer payments, or optimizing inventory levels to prevent overstocking.

Ultimately, understanding and optimizing the cash cycle ensures that a business remains liquid and agile.

Preparing for Seasonality and Unexpected Changes

Seasonality affects many businesses, from the ice cream vendor witnessing summer surges to the retailer bracing for holiday shopping frenzies.

By analyzing historical data and market trends, businesses can prepare for these cyclical shifts, ensuring they stock up, staff appropriately, and market effectively.

Small businesses, often operating on tighter margins , need to be especially vigilant. Beyond seasonality, they must also brace for unexpected changes – a local construction project obstructing store access, a sudden competitor emergence, or unforeseen regulatory changes.

Building a financial buffer, diversifying product or service lines, and maintaining flexible operational strategies can equip small businesses to weather these unforeseen challenges with resilience.

Securing Small Business Financing and Capital

Role of debt and equity financing.

When businesses seek external funding, they often grapple with the debt vs. equity conundrum. Debt financing involves borrowing money, typically via loans. While it doesn't dilute ownership, it necessitates regular interest payments, potentially impacting cash flow.

Equity financing, on the other hand, entails selling a stake in the business to investors. It might not demand regular repayments, but it dilutes ownership and might influence business decisions.

Small businesses must weigh these options carefully. While loans offer a structured repayment plan and retained control, they might strain finances if the business hits a rough patch.

Equity financing, although relinquishing some control, might bring aboard strategic partners, offering expertise and networks in addition to funds.

The optimal choice hinges on the business's financial health, growth aspirations, and the founder's comfort with sharing control.

Choosing Between Different Types of Loans

A staple in the lending arena, term loans offer businesses a fixed amount of capital that is paid back over a specified period with interest. They're often used for significant one-time expenses, such as purchasing machinery, real estate , or even business expansion.

With predictable monthly payments, businesses can plan their budgets accordingly. However, they might require collateral and a robust credit history for approval.

Lines of Credit

Unlike term loans that provide funds in a lump sum, a line of credit grants businesses access to a pool of funds up to a certain limit.

Businesses can draw from this line as needed, only paying interest on the amount they use. This makes it a versatile tool, especially for managing cash flow fluctuations or unexpected expenses. It serves as a financial safety net, ready for use whenever required.

As the name suggests, microloans are smaller loans designed to cater to businesses that might not need substantial amounts of capital. They're particularly beneficial for startups, businesses with limited credit histories, or those in need of a quick, small financial boost.

Since they are of a smaller denomination, the approval process might be more lenient than traditional loans.

Peer-To-Peer Lending

A contemporary twist to the traditional lending model, peer-to-peer (P2P) platforms connect borrowers directly with individual lenders or investor groups.

This direct model often translates to quicker approvals and competitive interest rates as the overheads of traditional banking structures are removed. With technology at its core, P2P lending can offer a more user-friendly, streamlined process.

However, creditworthiness still plays a pivotal role in determining interest rates and loan amounts.

Crowdfunding and Alternative Financing Options

In an increasingly digital age, crowdfunding platforms like Kickstarter or Indiegogo have emerged as viable financing avenues.

These platforms enable businesses to raise small amounts from a large number of people, often in exchange for product discounts, early access, or other perks. This not only secures funds but also validates the business idea and fosters a community of supporters.

Other alternatives include invoice financing, where businesses get an advance on pending invoices, or merchant cash advances tailored for businesses with significant credit card sales.

Each financing mode offers unique advantages and constraints. Small businesses must meticulously evaluate their financial landscape, growth trajectories, and risk appetite to harness the most suitable option.

Small Business Tax Planning and Management

Basic tax obligations for small businesses.

Navigating the maze of taxation can be daunting, especially for small businesses. Yet, understanding and fulfilling tax obligations is crucial.

Depending on the business structure—whether sole proprietorship , partnership , LLC , or corporation—different tax rules apply. For instance, while corporations are taxed on their earnings, sole proprietors report business income and expenses on their personal tax returns.

In addition to income taxes, small businesses may also be responsible for employment taxes if they have employees. This covers Social Security , Medicare , federal unemployment, and sometimes state-specific taxes.

There might also be sales taxes, property taxes, or special state-specific levies to consider.

Consistently maintaining accurate financial records, being aware of filing deadlines, and setting aside funds for tax obligations are essential practices to avoid penalties and ensure compliance.

Advantages of Tax Planning and Potential Deductions

Tax planning is the strategic approach to minimizing tax liability through the best use of available allowances, deductions, exclusions, and breaks.

For small businesses, effective tax planning can lead to significant savings.

This might involve strategies like deferring income to a later tax year, choosing the optimal time to purchase equipment, or taking advantage of specific credits available to businesses in certain sectors or regions.

Several potential deductions can reduce taxable income for small businesses. These include expenses like rent, utilities, business travel, employee wages, and even certain meals.

By keeping abreast of tax law changes and actively seeking out eligible deductions, small businesses can optimize their financial landscape, ensuring they're not paying more in taxes than necessary.

Importance of Hiring a Tax Professional or Accountant

While it's feasible for small business owners to manage their taxes, the intricate nuances of tax laws make it beneficial to consult professionals.

An experienced accountant or tax consultant can not only ensure compliance but can proactively recommend strategies to reduce tax liability.

They can guide businesses on issues like whether to classify someone as an employee or a contractor, how to structure the business for optimal taxation, or when to make certain capital investments.

Beyond just annual tax filing, these professionals offer year-round counsel, helping businesses maintain clean financial records, stay updated on tax law changes, and plan for future financial moves.

The investment in professional advice often pays dividends , saving businesses from costly mistakes, penalties, or missed financial opportunities.

Regularly Reviewing and Adjusting the Small Business Financial Plan

Setting checkpoints and milestones.

Like any strategic blueprint, a financial plan isn't static. It serves as a guiding framework but should be flexible enough to adapt to evolving business realities.

Setting regular checkpoints— quarterly , half-yearly, or annually—can help businesses assess whether they're on track to meet their financial objectives.

Milestones, such as reaching a specific sales target, launching a new product, or expanding into a new market, offer tangible markers of progress. Celebrating these victories can bolster morale, while any shortfalls can serve as lessons, prompting strategy tweaks. F

or small businesses, where agility is an asset, regularly revisiting the financial plan ensures that the business remains aligned with its overarching financial goals while being responsive to the dynamic marketplace.

Using Financial Ratios to Monitor Business Health

Financial ratios offer a distilled snapshot of a business's health. Ratios like the current ratio ( current assets divided by current liabilities ) can shed light on liquidity, indicating whether a business can meet short-term obligations.

The debt-to-equity ratio , contrasting borrowed funds with owner's equity, offers insights into the business's leverage and potential financial risk.

Profit margin , depicting profitability relative to sales, can highlight operational efficiency. By consistently monitoring these and other pertinent ratios, small businesses can glean actionable insights, understanding their financial strengths and areas needing attention.

In a realm where early intervention can stave off major financial setbacks, these ratios serve as vital diagnostic tools, guiding informed decision-making.

Pivoting Strategies Based on Financial Performance

In the ever-evolving world of business, flexibility is paramount. If financial reviews indicate that certain strategies aren't yielding anticipated results, it might be time to pivot.

This could involve tweaking product offerings, revising pricing strategies, targeting a different customer segment, or even overhauling the business model.

For small businesses, the ability to pivot can be a lifeline. It allows them to respond swiftly to market changes, customer feedback, or internal challenges.

A robust financial plan, while offering direction, should also be pliable, accommodating shifts in strategy based on real-world performance. After all, in the business arena, adaptability often spells the difference between stagnation and growth.

Bottom Line

Financial foresight is integral for the stability and growth of small businesses. Effective revenue and cash flow forecasting, anchored by historical sales data and enhanced by market research, local trends, and customer feedback, ensures businesses are prepared for future demands.

With the unpredictability of the business environment, understanding the cash cycle and preparing for unforeseen challenges is essential.

As businesses contemplate external financing, the decision between debt and equity and the myriad of loan types, should be made judiciously, keeping in mind the business's health, growth aspirations, and risk appetite.

Furthermore, diligent tax planning, with professional guidance, can lead to significant financial benefits. Regular reviews using financial ratios allow businesses to gauge their performance, adapt strategies, and pivot when necessary.

Ultimately, the agility to adapt, guided by a well-structured financial plan, is pivotal for businesses to thrive in a dynamic marketplace.

Creating a Small Business Financial Plan FAQs

What is the importance of a financial plan for small businesses.

A financial plan offers a structured roadmap, guiding businesses in making informed decisions, ensuring growth, and navigating financial challenges.

How do forecasting revenue and understanding cash cycles aid in financial planning?

Forecasting provides insights into expected income, aiding in budget allocation, while understanding cash cycles ensures effective liquidity management.

What are the core components of a financial plan for small businesses?

Core components include setting objectives, estimating startup costs, preparing financial statements, budgeting, forecasting, securing financing, and tax management.

Why is tax planning vital for small businesses?

Tax planning ensures compliance, optimizes tax liabilities through available deductions, and helps businesses save money and avoid penalties.

How often should a small business review its financial plan?

Regular reviews, ideally quarterly or half-yearly, ensure alignment with business goals and allow for strategy adjustments based on real-world performance.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Small business financial planning: setting yourself up for growth

Michael Henson Content Writer

Jun 19, 2024

You’re a small business owner, but you have big dreams. You want to see your business grow to become robust and profitable, but you aren’t sure how best to go about it. That’s why you need to take a serious approach to planning for business growth. 

Planning for growth means creating a successful small business financial plan, one which considers business goals, financial goals, and risk management . Working with a financial advisor is the best way to create a plan that includes retirement planning, funding options, and preparing for worst case scenarios. This article gives you financial planning tips to get you started to make informed decisions. 

Creating a financial plan for your small business

To set your small business up for success, you need a solid financial plan that includes both short-term and long-term business and financial goals, as well as strategies to achieve them. Then you can make informed decisions, access funding, and prepare for risks. Here are some tips to get you started:

Assess your financial situation

Every effective financial plan is built on accurate and reliable financial information. If you don’t already have a small business budget that charts your revenue, outgoings, and profit margins, now is the time to create one. You can download our small business budget planning template to simplify the process. 

Determine your goals

Next, figure out your key business and personal goals. Do you want to increase revenue by 20% this year? Expand into a new market? Be able to retire by the age of 50? Your financial plan should cover both short-term goals for stability and growth as well as long-term goals to build wealth. 

Manage risks and expenses

Now it’s time to evaluate potential risks and expenses. Speak to a financial advisor to determine appropriate risk management strategies for possibilities like economic downturns, loss of key customers, or expensive equipment failures. Your balance sheet shows your financial health, so look for ways to cut excess spending and budget for unexpected costs. Successful small businesses plan for worst-case scenarios to avoid crises.

Explore funding options

Think about how you will fund expanding your goals and operations. Options include business loans, lines of credit, crowdfunding, and personal investment. Meet with a financial advisor to evaluate what makes sense for your needs and risk tolerance. They can help you find good options and negotiate the best rates.

Setting business goals and assessing risks

As a small business owner, you need to define your business goals and plan for risks to set yourself up for growth. These should include personal and business goals, and both short-term aims and long-term plans. You can then assess potential risks that could hold you back from achieving your goals, and work out ways to avoid or mitigate them.

Determine your personal financial goals 

As a small business owner, your personal and business finances are closely linked. Think about your own financial goals, like saving for retirement, college funds for your kids, or paying off debt. A financial advisor can help you create a comprehensive plan that includes both business and personal financial goals. 

Set business goals

Think about why you started your business and what you want to achieve in the next 1-3 years. Do you want to increase revenue or profits? Open a new location? Setting specific, measurable goals will help guide your financial planning. Work with a financial advisor to determine how much money you need to achieve your goals and the funding options available, like small business loans, crowd-funding, or business credit cards. 

Manage risks

Identify potential risks to your cash flow and profits, like economic downturns, loss of key customers, or supply chain issues. Come up with a worst-case scenario plan that includes cutting costs, alternative funding sources, and ways to increase revenue. Planning for risks will help you make better informed decisions if problems arise. You’ll want to revisit your risk assessments regularly as your business grows and evolves.

Managing finances and cash flow

To set your small business up for growth, you need to get a handle on your finances. As a small business owner, this means developing realistic business and financial goals, managing risks, and planning how to fund future growth.

Successful small businesses monitor their financial health regularly and make changes to support growth and stability. That’s why you need to look at your balance sheet, income statement, cash flow statement, and key ratios to determine your company’s financial health. 

The balance sheet shows your assets, liabilities, and equity at a given point in time. The income statement shows your revenue, expenses, and profits over a period of time. Analyzing these financial statements will tell you if you have enough cash on hand, if expenses are too high, if you’re overleveraged with debt, or if profits are growing. 

Retirement planning options for small business owners

Saving for retirement is crucial for your long term financial health, and requires balancing your business’s financial health today with your own financial goals for the future. Speaking to a financial advisor who specializes in small business planning can help determine the right mix based on your business goals and risk tolerance. There are several options tailored to small businesses that provide tax benefits and flexibility.

Simplified Employee Pension (SEP) IRA

A SEP IRA allows you to contribute up to 25% of your salary, or $66,000 for 2023 , whichever is less. Contributions are tax-deductible and the plan is easy to set up and administer. A SEP IRA provides flexibility, since you can vary contributions from year to year based on your business’s financial performance.

Individual 401(k)

An individual 401(k), or solo 401(k), operates similar to a traditional 401(k) but is designed for self-employed individuals and small business owners. For 2024, you can contribute up to $23,000 as an employee , plus up to 25% of your compensation as an employer, for a total of $69,000. A solo 401(k) allows for loans and hardship withdrawals, and contributions can be made up until your tax filing deadline.

Profit-sharing plan

A profit-sharing plan allows you to contribute a percentage of your business’s profits to a retirement plan. Contributions are discretionary and the plan provides flexibility in how profits are distributed to employees. The contribution limit is 25% of compensation or $69,000 for 2024 , and contributions are tax deductible. Profit sharing plans require non-discrimination testing to ensure benefits are fairly distributed among employees.

Effective financial planning is the key to successful business growth

By following these tips and taking advantage of resources for planning for small business, you can develop a successful small business financial plan to guide your company to growth and prosperity. Keep refining and revising your plan as your business evolves. With the right plan in place, you can make informed decisions to ensure the financial health and success of your business for years to come.

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Paramount Global Co-CEOs Have Hired Bankers to Evaluate Asset Sales, Tell Employees They’ve Identified Areas for Job Cuts

By Todd Spangler

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Paramount Global ‘s trio of co-CEOs provided an update Tuesday at a town hall for the company’s more than 20,000 employees on where things stand with their plan to cut costs, boost revenue and pare down debt after a potential merger with Skydance was called off.

The three execs — George Cheeks , president and CEO of CBS; Chris McCarthy , president and CEO, Showtime/MTV Entertainment Studios and Paramount Media Networks; and Brian Robbins , president and CEO of Paramount Pictures and Nickelodeon — were installed as co-CEOs after Bob Bakish’s dismissal in late April.

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As the trio of execs previously disclosed, Cheeks said the Paramount leaders are “looking at selling certain Paramount-owned assets” and said, “in fact, we’ve already hired bankers to assist us in this process — and we’ll use the proceeds to help pay down debt and strengthen our balance sheet.” He didn’t itemize which Paramount Global assets may be on the block, but those could include BET Media, the VidCon creator tradeshow division and the Paramount Pictures lot.

The town hall meeting had originally been set for June 5 but the co-CEOs rescheduled it for June 25, citing “ongoing speculation regarding potential M&A.” On June 11, Shari Redstone, Paramount Global’s controlling shareholder, ended talks about merging the company with David Ellison’s Skydance Media .

At this point, Redstone may still be looking to sell her stake in National Amusements Inc., which owns 77% of the voting shares in Paramount. Parties that have come forward to express interest in a deal for NAI have included ex-Warner Music and Seagram boss Edgar Bronfman Jr. together with Bain Capital as well as producer and filmmaker Steven Paul.

At the beginning of the town hall, Robbins spoke about the ongoing M&A chatter. “We’d like to take a moment to acknowledge the challenges of all the M&A speculation surrounding our company. We know what a difficult and disruptive period it has been,” Robbins said. “And while we cannot say that the noise will disappear, we are here today to lay out a go-forward plan that can set us up for success no matter what path the company chooses to go down.”

The co-CEOs addressed the fact that Paramount’s overall revenue grew by 13% between 2018-23 while adjusted operating income declined 61% over that period. “Let me be clear… a 61% decline in profits is simply unacceptable,” McCarthy told employees. “We need to act now to reverse this trend.”

Another key pillar of the three execs’ strategy is to boost the profitability of its Paramount+ streaming business to make up for linear declines. McCarthy told staffers that on the international front, “we are advancing talks with potential partners that will significantly transform the scale and economics of the service making it profitable and driving long-term value. This approach could also serve as a model for the U.S.”

In recent months, Paramount has discussed merging Paramount+ with NBCUniversal’s Peacock in some way. The two companies are already joint-venture partners in the European streaming service SkyShowtime.

At the June 4 shareholders meeting, Cheeks, Robbins and McCarthy provided an outline of their go-it-alone strategy . The expected job cuts will result in a “leaner and more nimble” company, Cheeks said, adding that layoffs will target “duplicative teams and functions across the organization, real estate, marketing and other corporate overhead categories.”

Tuesday’s town hall at the Paramount Theatre drew a crowd of some 500 employees, with several thousand more watching via livestream. The co-CEOs spoke for about an hour, including a Q&A session during which they fielded questions from staff after their prepared remarks.

On June 10,  Paramount extended change-in-control severance benefits to Cheeks, McCarthy and Robbins  that kick in if the company transacts a sale or merger, guaranteeing each of them severance packages of two times their annual salary plus target bonus, among other perks. The company also will grant them cash bonuses for the time during which they serve as co-CEOs. 

Pictured above (l. to r.): George Cheeks, Chris McCarthy, Brian Robbins

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Bankruptcy trustee discloses plan to shut down Alex Jones’ Infowars and liquidate assets

Alex Jones speaks to the media after arriving at the federal courthouse for a hearing in front of a bankruptcy judge, June 14, 2024, in Houston. A U.S. bankruptcy court trustee is planning to shut down Jones’ Infowars media platform and liquidate its assets to help pay the $1.5 billion in lawsuit judgments Jones owes for repeatedly calling the 2012 Sandy Hook Elementary School shooting a hoax. (AP Photo/David J. Phillip, file)

FILE - The lawyers representing the families of the victims of the shooting at Sandy Hook Elementary speak to the media in Waterbury, Conn, Oct. 12, 2022. A U.S. bankruptcy court trustee is planning to shut down conspiracy theorist Alex Jones’ Infowars media platform and liquidate its assets to help pay the $1.5 billion in lawsuit judgments Jones owes for repeatedly calling the 2012 Sandy Hook Elementary School shooting a hoax. (AP Photo/Bryan Woolston, File)

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A U.S. bankruptcy court trustee is planning to shut down conspiracy theorist Alex Jones’ Infowars media platform and liquidate its assets to help pay the $1.5 billion in lawsuit judgments Jones owes for repeatedly calling the 2012 Sandy Hook Elementary School shooting a hoax.

In an “emergency” motion filed Sunday in Houston, trustee Christopher Murray indicated publicly for the first time that he intends to “conduct an orderly wind-down” of the operations of Infowars’ parent company and “liquidate its inventory.” Murray, who was appointed by a federal judge to oversee the assets in Jones’ personal bankruptcy case, did not give a timetable for the liquidation.

Jones has been saying on his web and radio shows that he expects Infowars to operate for a few more months before it is shut down because of the bankruptcy. But he has vowed to continue his bombastic broadcasts in some other fashion, possibly on social media. He also had talked about someone else buying the company and allowing him to continue his shows as an employee.

Murray also asked U.S. Bankruptcy Judge Christopher Lopez to put an immediate hold on the Sandy Hook families’ efforts to collect the massive amount Jones owes them. Murray said those efforts would interfere with his plans to close the parent company, Free Speech Systems in Austin, Texas, and sell off its assets — with much of the proceeds going to the families.

On Friday, lawyers for the parents of one of the 20 children killed in the shooting in Newtown, Connecticut, asked a state judge in Texas to order Free Speech Systems, or FSS, to turn over to the families certain assets, including money in bank accounts, and garnish its accounts. Judge Maya Guerra Gamble approved the request, court records show, prompting Murray’s emergency motion.

The parents, Neil Heslin and Scarlett Lewis, whose 6-year-old son, Jesse Lewis, was killed in the shooting, won a $50 million verdict in Texas over Jones’ lies about the shooting being a hoax staged by crisis actors with the goal of increasing gun control. In a separate Connecticut lawsuit, Jones was ordered to pay other Sandy Hook families more than $1.4 billion for defamation and emotional distress.

Referring to the families’ collection efforts, Murray said in the Sunday court filing that “The specter of a pell-mell seizure of FSS’s assets, including its cash, threatens to throw the business into chaos, potentially stopping it in its tracks, to the detriment” of his duties in Jones’ personal bankruptcy case.

“The Trustee seeks this Court’s intervention to prevent a value-destructive money grab and allow an orderly process to take its course,” Murray said.

Murray also asked the judge to clarify his authority over Jones’ bank accounts. As part of Jones’ personal bankruptcy case, his ownership rights of FSS were turned over to Murray. Jones has been continuing his daily broadcasts in the meantime.

It was not immediately clear when the bankruptcy judge would address Murray’s motion.

Bankruptcy lawyers for Jones, Heslin and Lewis did not immediately return messages seeking comment Monday.

Christopher Mattei, a lawyer for the Sandy Hook families in the Connecticut lawsuit, said they supported the trustee’s new motion. He also said the families were disappointed with the motion filed Friday in the Texas court by Heslin and Lewis, which he said would “undercut” an equitable distribution of Jones’ assets to all the families.

“This is precisely the unfortunate situation that the Connecticut (lawsuit) families hoped to avoid,” Mattei said.

The families in both lawsuits, who have not received anything from Jones yet, appear likely to get only a fraction of what Jones owes them.

Jones has about $9 million in personal assets, according to the most recent financial filings in court. Free Speech Systems has about $6 million in cash on hand and about $1.2 million worth of inventory, according to recent court testimony.

On June 14, Lopez, the bankruptcy judge, approved converting Jones’ personal bankruptcy case from a reorganization to a liquidation , which Jones requested. Lopez also dismissed the reorganization bankruptcy case of FSS, after lawyers for Jones and the Sandy Hook families could not agree on a final bankruptcy plan.

The bankruptcy cases had put an automatic hold on the families’ efforts to collect any of the $1.5 billion, under federal law. The dismissal of the FSS bankruptcy meant the families would have to shift those efforts from the bankruptcy court to the state courts in Texas and Connecticut where they won the legal judgments.

Jones and Free Speech Systems filed for bankruptcy protection in 2022, the same year that relatives of many victims of the school shooting that killed 20 first graders and six educators won their lawsuits.

The relatives said they were traumatized by Jones’ hoax conspiracies and his followers’ actions. They testified about being harassed and threatened by Jones’ believers, some of whom confronted the grieving families in person saying the shooting never happened and their children never existed. One parent said someone threatened to dig up his dead son’s grave.

Jones is appealing the judgments in the state courts. He has said that he now believes the shooting did happen, but free speech rights allowed him to say it didn’t.

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Best Equipment Financing Options of 2024

Randa Kriss is a lead writer and NerdWallet authority on small business. She has nearly a decade of experience in digital content. Prior to joining NerdWallet in 2020, Randa worked as a writer at Fundera, covering a wide variety of small-business topics and specializing in the lending and banking spaces. Her work has been featured in The Washington Post, The Associated Press, MarketWatch and Nasdaq, among other publications. She has also hosted a webinar as part of the SBA's 2024 National Small Business Week Virtual Summit. Randa is passionate about helping small-business owners make educated financial decisions, especially when it comes to affordable funding. She is based in Chicago.

Sally Lauckner is an editor on NerdWallet's small-business team. She has over 15 years of experience in print and online journalism. Before joining NerdWallet in 2020, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content and specializing in business financing. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She is based in New York City.

Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money .

Equipment financing is a loan for purchasing machinery and equipment essential to running your business. You can use an equipment loan for anything from office furniture and medical equipment to farm machinery or commercial ovens.

Small-business equipment loans are available from bank, online and SBA lenders. There are also specialized equipment finance companies that focus solely on this type of small-business loan .

Why trust NerdWallet

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95+ year s of combined experience covering small business and personal finance.

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Objective and comprehensive business loans ratings rubric . ( Learn more about our star ratings .)

NerdWallet's small-business loans content, including ratings, recommendations and reviews, is overseen by a team of writers and editors who specialize in business lending. Their work has appeared in The Associated Press, The Washington Post, MarketWatch, Nasdaq, Entrepreneur, ABC News, MSN and other national and local media outlets. Each writer and editor follows NerdWallet's strict guidelines for editorial integrity to ensure accuracy and fairness in our coverage.

• Best equipment financing options

National Funding

National Funding - Equipment Financing

Qualifications:

Minimum credit score: 600 .

Minimum time in business: 6 months.

Minimum annual revenue: $250,000.

National Funding offers equipment loans with no down payment requirement to businesses that have been in operation for just six months.

Funding in as little as 24 hours.

Prepayment discounts available.

Offers loans to startups and borrowers with bad credit.

No collateral or down payment required.

Charges a factor rate making it more difficult to compare costs with other lenders.

Requires higher annual revenue than other online lenders.

OnDeck - Online term loan

Minimum credit score: 625 .

Minimum time in business: 12 months.

Minimum annual revenue: $100,000.

OnDeck’s term loan is an option for businesses that need a lump sum of money to purchase equipment. Funding can be available within the same business day.

Cash can be available within the same business day.

Streamlined application process with minimal documentation required.

Can be used to build business credit.

Requires frequent (daily or weekly) repayments.

Requires business lien and personal guarantee.

Not available in Nevada, North Dakota or South Dakota.

SBA 7(a) loan

Must be a for-profit U.S. business.

Unable to access credit on reasonable terms from non-government sources.

Financial qualifications determined by individual lender.

The long repayment terms and low interest rates available through an SBA 7(a) loan make it a good option for large-ticket purchases like equipment.

Large borrowing maximums.

Interest rates are capped.

Long repayment terms available.

Personal guarantee is required.

Collateral is typically required.

Longer processing times than online lenders.

Bank of America

Bank of America - Equipment loan

Minimum credit score: 700 .

Minimum time in business: 2 years.

Bank of America’s equipment loans can be used for a wide range of business needs, from purchasing heavy-industrial equipment to smaller office equipment.

Competitive interest rates.

Longer repayment periods.

Preferred Rewards program can offer interest rate discounts and other perks.

Multiple years in business required.

Limited rate and fee information online.

Can be slow to fund.

Application cannot be completed online.

Triton Capital

Triton Capital - Equipment financing

Minimum credit score: 575 .

Minimum time in business: 24 months.

Triton Capital offers equipment financing to borrowers with credit scores starting at 575.

Can fund within one to two business days.

No prepayment penalty.

Flexible repayment options: monthly, quarterly, annually or semiannually.

Typically requires a personal guarantee and UCC lien.

Requires high minimum annual revenue.

JR Capital Equipment Financing

$10,000,000

Minimum credit score: 620 .

No minimum annual revenue requirement.

JR Capital offers equipment loans and leases up to $10 million with terms that start at three years and don’t typically require a down payment.

Funding available within 48 hours.

Competitive rates and repayment terms.

No down payment required.

Must have good credit to qualify for no prepayment penalties.

Not ideal for short-term purchases; terms start at three years.

Balboa Capital

Balboa Capital - Equipment Financing

Balboa Capital offers a variety of loan term lengths. Depending on the type of equipment and the size of the loan, terms may be 24, 36, 48 or 60 months.

Multiple financing options available.

Fast funding and simple application process.

Accepts borrowers with fair credit.

Lack of pricing information on website.

U.S. Bank Equipment Financing

U.S. Bank can offer up to 125% equipment financing that includes soft costs such as installation, tax and freight.

No down payment or blanket lien required.

Option to finance multiple pieces of equipment on one contract.

Offers up to 25% in additional financing to cover soft costs, such as installation, taxes and freight.

Can only apply online for transactions under $250,000.

Interest rates and qualification requirements not disclosed online.

• How to compare equipment financing offers

To find the best loan for your needs, you should get offers from multiple lenders and compare factors such as as the following:

Interest rate. One of the main factors that determines the cost of a loan is the interest rate. A lower interest rate can often save you money.

Loan fees. Additional fees such as origination and processing fees add to the cost of a loan. Large loan fees can, in some cases, offset the benefits of a lower interest rate.

Annual percentage rate. APR uses the interest rate plus loan fees to provide the total cost of the loan. It can be helpful in comparing loan offers with different rates and fees to determine the overall cost of each loan.

Repayment term. The repayment term affects your monthly payment amount and the total interest you pay. A shorter repayment term may save you money, but the monthly payment shouldn’t be more than your budget allows.

Prepayment penalties. Some lenders charge a fee when a borrower pays off their loan early. A loan with a prepayment penalty may not be the right fit if you think you may want to pay it off before the term ends.

Funding time. There are times you may need to prioritize funding speed for a loan. However, keep in mind that faster funding often means higher interest rates and shorter terms.

• What is equipment financing?

Equipment financing refers to a loan that's used to purchase business machinery and equipment. Equipment loans are typically structured as term loans that you repay, with interest, over a specific period of time.

You can use equipment loans to buy assets such as office and computer equipment, industrial machinery and business vehicles.

• How equipment financing works

Equipment financing is a type of asset-based financing , which means the equipment itself is collateral for the loan.

You can get an equipment loan up to the full value of the equipment you’re looking to purchase — depending on which equipment finance company you use and your business’s qualifications.

Some small-business lenders may also finance some of the soft costs such as delivery, installation, warranties, assembly and other one-time expenses required to get your equipment set up and running.

Certain equipment financing companies will finance a portion of these costs on top of the full value of your equipment — offering, for example, 125% financing — 100% for the equipment, 25% for soft costs.

Other equipment financing companies, however, may finance only a percentage of the cost of the equipment, say 75%, and allot the remainder of the loan (25%) to your soft costs.

Because soft costs typically require a large investment upfront when you purchase your equipment — and don’t add value to the equipment long term — it can be helpful to find an experienced equipment financing company that will finance some of these expenses.

This way, you’re receiving the same interest rate to finance your soft costs as you are for the rest of your equipment loan — and you don’t have to use funds you have on hand or take out a separate loan to cover them.

Equipment financing vs. equipment leasing

Equipment leasing may be an option when you’re unable to get an equipment loan or it isn’t the right fit for your needs. With equipment leasing, you rent the equipment from a vendor, lender or specialized equipment leasing company .

• How to apply for an equipment loan

The loan application process will vary by lender, but here are some steps to help you start the process:

1. Determine the size of your loan

Knowing the loan amount you need to purchase equipment will help you narrow your search for lenders who can offer that amount. It can also be used to estimate the amount of debt you can afford and monthly payments.

2. Review your qualifications

Number of years in business, personal and business credit scores and annual revenue are some common factors used by lenders to qualify a business for financing. Knowing how you compare to lender requirements can save you time in finding the right loan.

3. Gather documentation and apply

Whether you apply online or in person, you’ll typically need the following to start the application process:

Basic information about you and your business.

Personal bank statements and tax returns.

Business bank statements and tax returns.

Business financial statements.

Description of equipment and estimated cost.

• Pros and cons of equipment financing

Affordable: Equipment loans can provide competitive interest rates and long terms.

Equipment ownership: You’ll own the equipment outright once the loan is repaid.

Self-collateralizing: Since the equipment is often used as collateral for the loan, there may be less reliance on personal credit, time in business or other collateral.

Tax savings: The interest you’ve paid is tax deductible, and you may also qualify for a depreciation tax benefit.

Outdated equipment: If the financed equipment becomes outdated, you’ll need to sell or dispose of it.

Down payment: May require a high initial down payment.

Maintenance costs: When you buy equipment, you are typically responsible for maintenance costs.

No trial run period: You often give up the opportunity to try out the equipment — something that would be available through a short-term lease.

» MORE: Best startup business loans

• Equipment financing rates and terms

Repayment terms and interest rates on equipment loans can vary depending on the equipment finance company, your business’s qualifications and how long the equipment you’re purchasing is projected to have value.

Anecdotally, equipment financing interest rates range from 4% to 45% APR.

Generally, terms on business equipment loans are based on the anticipated life of the equipment or machinery you’re purchasing.

An equipment loan calculator can be used to estimate your monthly payments as well as the total cost of your loan.

• Where to get equipment financing

There are specialized equipment financing companies that offer loans based on the type of equipment you need for your business such as:

Commercial truck financing .

Construction and heavy equipment financing .

Farm equipment financing .

Gym equipment financing .

Dental equipment financing .

Restaurant equipment financing .

These equipment financing companies can offer experts who are knowledgeable about the specific type of equipment you want to purchase for your business, something that may not be available at a bank or online lender. However, keep in mind that interest rates and terms offered by these finance companies are unlikely to be as favorable as those offered by a bank.

Online equipment finance companies can offer access to equipment financing with more flexible qualifications than traditional bank or SBA loans. Some online lenders work with startups or businesses with bad credit.

Many online business lenders also offer streamlined application processes and fast financing — in some cases, funding loans within 24 hours.

Equipment loans from online equipment financing companies are typically more expensive than bank or SBA loans, however, with shorter terms and higher interest rates.

Although banks and credit unions generally offer small-business equipment loans with the most favorable interest rates and terms, they also have strict eligibility requirements . To qualify for equipment financing from a bank, you’ll typically need strong personal credit, several years in business and excellent financials. For example, Bank of America requires a minimum of 24 months in business and $250,000 in annual revenue to get an equipment loan with up to a 60 months term.

If you can meet these requirements, however, getting an equipment loan from a bank or credit union will likely be your most affordable option. Plus, some institutions, like U.S Bank have business divisions devoted to equipment financing and Wells Fargo has an inventory of used commercial and industrial equipment available for sale to businesses — in addition to offering equipment financing.

As an alternative to traditional bank financing, you might work with an SBA lender (typically a bank or credit union) to get an SBA loan. SBA loans have long terms — generally up to 10 years for equipment loans — and low interest rates. They also allow you to use the equipment you’re purchasing, as well as equipment you already own, as collateral.

To qualify for an SBA loan , you’ll generally need a good personal credit score, 690 or higher (although some SBA lenders may have lower score requirements), and strong business finances.

» MORE: Average business loan rate: What to know about interest costs

• Methodology

NerdWallet’s review process evaluates and rates small-business loan products from traditional banks and online lenders. We collect over 30 data points on each lender using company websites and public documents. We may also go through a lender’s initial application flow and reach out to company representatives. NerdWallet writers and editors conduct a full fact check and update annually, but also make updates throughout the year as necessary.

Our star ratings award points to lenders that offer small-business friendly features, including:

Transparency of rates and terms.

Flexible payment options.

Fast funding times.

Accessible customer service.

Reporting of payments to business credit bureaus.

Responsible lending practices.

We weigh these factors based on our assessment of which are the most important to small-business owners and how meaningfully they impact borrowers’ experiences.

NerdWallet does not receive compensation for our star ratings. Read more about our ratings methodology for small-business loans and our editorial guidelines .

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