What Is A Fixed Asset Loan?

Business owners, irrespective of how small or large their operations, sometimes have cause to seek loans such as Asset Based Loans (ABL) to fund their businesses and get capital to either pay their employees or get equipment to keep the business growing.

One type of asset based lending business owners usually go for is a fixed asset loan. This article is aimed at helping you understand what you should know about fixed asset loans.

Simply put,  a fixed asset loan is a mid-term or long-term local or foreign-currency loans given out to business owners by credit providers for the construction, renovation, acquisition and installation of equipment in projects that have fixed assets.

It is basically a type of loan given to borrowers in order to carry out projects that have fixed assets. Basically, if you are a business owner who is looking into making fixed assets investments like purchase or construction of a warehouse or store, you are allowed to get a fixed asset loan to achieve that.

It should be noted that in order to take up a fixed asset loan, it has to be approved by various regulatory bodies related to the business you are taking the loan for.

Classification Of Fixed Asset Loan

Fixed asset loans are basically classified into; infrastructure construction loans that are taken in order to carry out the construction of infrastructures to be used for the business.

These types of loan are usually mid-term or long-term loans that are used to fund the construction of infrastructure. A construction loan can be taken to cover the cost of land/property acquisition, materials needed and the labour required.

There is also the technical renovation loan that can be taken to carry out any technical renovations a business owner might have in order to promote the business. This can typically cover the cost to install new equipment for the business, carry out renovations of the warehouse or store and so on. Both types of fixed asset loans are usually given out after approval have been given by necessary regulatory bodies.

How Do Fixed Term Loans Work?

As a business owner who is looking into carrying out fixed assets investments, you have the option of going for fixed asset loans that give you option of a mid-term (up to five years)  or a long-term (up to ten years) agreement between you and your bank/credit provider.

The tenure for a fixed asset loan typically depends on an agreement between the borrower and the lender but it legally runs up to a minimum of 5 years and a maximum of 10 years.

Also, fixed asset loans allow you as a business owner to borrow a large amount of money as it is used to make fixed assets investments that are expected to last for a long period of time.

Agreement between the borrower and the lender will usually be influenced by the borrower’s assets investments needs such as how much would be needed for construction or renovation, the borrower’s production cycle and the borrower’s repayment capacity.

Basically, the lender will look into the borrower’s credit history, the business and the capability of the borrower to pay back the principal as well as the interest of the loan. The borrower can make an agreement with the lender to make the loan a drawdown. This helps to reduce the balance of the loan by instalments and it roves pressure from the borrower.

Activities You Can Acquire A Fixed Asset Loan For

As a business owner, you should take up a fixed asset loan for a couple of activities that promise you fixed assets. Basically, if you are going to take up a fixed asset loan, it should be because you are trying to fund projects that are sure to provide you cash as long as they are in existence. Some of the things you can take up a fixed asset loan for are:

●        A leveraged buyout.  If you are looking into purchasing another business, you can take up a fixed asset loan and use the assets of that business as collateral. Usually, you will expect to use the cash flow of that business to clear off the debt you incur from purchasing it.

●       Equipment financing. Fixed asset loans provide you with funds to procure equipment that can boost your business’s productivity. You can use the equipment as collateral for the loan and use whatever is gotten from the use of the equipment to clear off your debt.

●       Acquisition/purchase and/or renovation of warehouses, stores, offices and so on. You can take up a fixed asset loan to acquire or construct infrastructures such as warehouses.

●       New venture financing. You can make a decision to venture into a new type of business. You might need finances for this and taking up a fixed asset loan is a sure means to get funds.

The Application Process For A Fixed Asset Loan

Whatever would be required for application for a fixed asset loan would usually be dependent on what your bank/credit provider requests for.

However, there are some things that you should generally expect if you are looking to taking up a fixed asset loan. Here they are:

●       You will be required to fill out an application form that would be provided by your bank/credit provider. Alongside your application form, you will be typically expected to provide the following documents: financial statements of the business (typically the last 3years.

If the business is that old, you should provide all available financial statements), auditing reports that have been verified by a Certified Public Accountant (CPA), tax registration certificate, operations permit.

You would also be required to produce a list of your directors, executives and financial managers, alongside samples of their signature. All of these are basically to prove to the bank/credit provider that you are authorized to run the business or operations you want to carry out.

●       A good credit history. You should be able to prove that you have a good credit history, that would show that you can easily pay bay the principal and interest of the loan.

●       You also have to be able to prove that your business meets the credit policy laid down by your bank/credit provider. There might be laid down policies that your business would have to meet the requirements before you are eligible to take a loan on it.

●       You might also be required to provide a credit certified guarantor if there is an agreement for guarantee.

Conclusion

If after applying for a fixed asset loan your bank/credit provider approves the application, the both of you will sign required agreements and after this, you would be allowed to withdraw your funds according to the agreements reached. Repayments will also be made according to agreements reached and you have to ensure that you meet the terms on which the loan was given to you.