What are the potential risks and drawbacks of asset finance for my business?

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What are the potential risks and drawbacks of asset finance for my business?

As with any form of financing, asset finance also comes with potential risks and drawbacks that businesses should be aware of. These may include:

  • Costs
    Asset finance typically involves interest rates, fees, and charges that can increase the overall cost of borrowing. These costs can impact your business’s profitability and should be carefully considered in your financial planning.
  • Asset ownership
    In certain types of asset finance, such as lease or hire purchase arrangements, the lender retains ownership of the asset until the financing is fully repaid. This means you may not fully own the asset until the funding is paid off, which could impact your ability to use, sell, or transfer the asset during the financing term.
  • Obligations and responsibilities
    When entering into an asset finance arrangement, you may have obligations and responsibilities, such as maintaining and insuring the asset, adhering to usage restrictions, and meeting other contractual terms. Failure to fulfil these obligations may result in penalties or other consequences.
  • Default risk
    If you fail to make timely payments on your asset finance agreement, you could default, adversely affecting your credit rating and business reputation. The lender may also have the right to repossess the financed asset as collateral, which could disrupt your business operations.
  • Market value risk
    The value of assets can fluctuate over time due to market conditions, technological advancements, or other factors. If the market value of the financed asset declines significantly, it may impact your ability to refinance, sell, or dispose of the asset in the future.
  • Restrictions on asset use
    Depending on the type of asset finance, there may be restrictions on how to use the financed asset. For example, in a lease agreement, you may have limitations on the asset’s modifications, usage, or transfer. These restrictions could impact your business operations and flexibility.
  • Early termination costs
    Exiting an asset finance agreement before the agreed-upon term may result in early termination costs, such as prepayment penalties or other fees. If you anticipate terminating the agreement before the scheduled end date, these costs should be considered.

It’s important to carefully assess the risks and drawbacks associated with asset finance and consider them in conjunction with your business’s potential benefits and suitability. Consulting with financial advisors, thoroughly reviewing the financing agreement, and understanding the terms and conditions are crucial steps in mitigating risks and making informed decisions for your business.

How can Sterling Commercial Finance Help?

At Sterling Commercial Finance, we’ve been helping businesses access funding for over 20 years. Contact the team today to see how we can help your business.

Discuss your financial needs with a member of our team 0115 9849800 or email info@sterlingcommmercialfinance.co.uk
Alternatively, complete our Online Enquiry Form.