Asset Financing in Nigeria – Everything you need to know

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Sirmike Thursday, 19 September 2024, 6:05 pm

Asset Financing in Nigeria – Everything you need to know

Asset financing is a type of borrowing that allows businesses to acquire assets, such as equipment, vehicles, or real estate, without having to pay for them upfront. Instead, the business makes regular payments to the lender over a set period of time, and then owns the asset at the end of the term.

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There are two main types of asset financing:

Operating leases: In an operating lease, the business does not own the asset. Instead, it simply leases the asset from the lender for a set period of time. At the end of the lease, the business has the option to purchase the asset, but it is not obligated to do so.
Financial leases: In a financial lease, the business does own the asset. The lender simply finances the purchase of the asset, and the business makes regular payments to the lender over a set period of time. At the end of the lease, the business owns the asset outright.

Asset financing can be a good option for businesses that need to acquire assets but do not have the cash flow to pay for them upfront. It can also be a good option for businesses that want to defer the payment of taxes on the acquisition of an asset.

Here are some of the benefits of asset financing:

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Access to capital: Asset financing can provide businesses with access to capital that they would not otherwise be able to obtain. This can be helpful for businesses that are growing rapidly or that need to acquire new assets in order to stay competitive.
Tax benefits: In some cases, asset financing can provide businesses with tax benefits. For example, businesses that lease assets may be able to deduct the lease payments as an operating expense.
Improved cash flow: Asset financing can help businesses improve their cash flow by allowing them to defer the payment of the full cost of an asset. This can be helpful for businesses that are struggling to meet their short-term financial obligations.

Here are some of the drawbacks of asset financing:

Higher interest rates: Asset financing typically comes with higher interest rates than traditional loans. This is because the lender is taking on more risk by financing the purchase of an asset.
Long-term commitments: Asset financing often involves long-term commitments. This means that businesses may be locked into making regular payments for an extended period of time, even if their financial situation changes.
Loss of ownership: In the case of an operating lease, the business does not own the asset. This means that the business does not have the same level of control over the asset as it would if it owned it outright.

Overall, asset financing can be a good option for businesses that need to acquire assets but do not have the cash flow to pay for them upfront. However, it is important to carefully consider the pros and cons of asset financing before making a decision.

What is the difference between asset financing and a loan?

Asset financing and a loan are both types of financing that can be used to acquire assets. However, there are some key differences between the two.

Asset financing is secured by the asset being financed. This means that if the borrower defaults on the loan, the lender can seize the asset. With a loan, the lender is not typically secured by any asset, so they are taking on more risk.
Asset financing typically has shorter terms than a loan. This is because the lender is relying on the value of the asset to repay the loan. With a loan, the lender may be willing to give the borrower a longer term to repay the loan, even if they are not secured by any assets.
Asset financing typically has lower interest rates than a loan. This is because the lender is taking on less risk by being secured by the asset. With a loan, the lender is taking on more risk, so they may charge a higher interest rate to compensate.

Here are some examples of asset financing:

Equipment leasing: This is a type of asset financing where the borrower leases an asset from the lender for a specified period of time. At the end of the lease, the borrower has the option to purchase the asset for a predetermined price.
Hire purchase: This is another type of asset financing where the borrower purchases an asset from the lender over a specified period of time. The borrower makes regular payments to the lender, and at the end of the term, they own the asset outright.

Here are some examples of loans:

Business loan: This is a type of loan that is specifically designed for businesses. Businesses can use business loans to finance a variety of expenses, such as equipment purchases, working capital, or expansion.
Personal loan: This is a type of loan that is available to individuals. Personal loans can be used for a variety of purposes, such as consolidating debt, paying for a major purchase, or financing a vacation.

The best type of financing for you will depend on your individual circumstances. If you have a valuable asset that you can use as collateral, asset financing may be a good option for you. If you do not have any assets to secure a loan, or if you need a longer term to repay the loan, a traditional loan may be a better option.

How does asset financing in Nigeria work?

Asset financing in Nigeria is a type of loan that allows businesses and individuals to acquire assets without having to pay the full purchase price upfront. Instead, the lender (usually a bank or financial institution) purchases the asset and leases it to the borrower, who then makes monthly payments over a set period of time. At the end of the lease term, the borrower has the option to purchase the asset for a nominal fee.

Here are some of the benefits of asset financing in Nigeria:

Allows businesses and individuals to acquire assets that they may not be able to afford to purchase outright.
Provides access to a wider range of assets, including those that are not typically available through traditional lending products.
Can help businesses and individuals improve their cash flow and working capital.
Offers flexible repayment terms that can be tailored to the borrower’s needs.

Here are some of the drawbacks of asset financing in Nigeria:

The borrower must make monthly payments for the duration of the lease term, even if the asset is not being used.
The borrower may be required to make a down payment or equity contribution.
The interest rates on asset financing loans can be higher than those on traditional loans.
The borrower may not be able to purchase the asset at the end of the lease term if they cannot afford the balloon payment.

Overall, asset financing can be a good option for businesses and individuals who need to acquire assets but do not have the cash on hand to purchase them outright. However, it is important to carefully consider the terms and conditions of the loan before signing any paperwork.

Here are some of the specific steps involved in asset financing in Nigeria:

The borrower identifies the asset they wish to acquire and approaches a lender for a loan.
The lender assesses the borrower’s creditworthiness and determines the amount of loan they are eligible for.
The lender purchases the asset and leases it to the borrower.
The borrower makes monthly payments to the lender over a set period of time.
At the end of the lease term, the borrower has the option to purchase the asset for a nominal fee.

The specific requirements for asset financing in Nigeria will vary depending on the lender. However, most lenders will require borrowers to meet the following criteria:

Have a good credit score
Provide proof of income
Make a down payment or equity contribution
Secure a guarantor

If you are considering asset financing in Nigeria, it is important to research different lenders and compare their terms and conditions before making a decision. You should also speak to a financial advisor to get personalized advice on whether asset financing is the right option for you.

What are the benefits of asset financing in Nigeria?

Asset financing in Nigeria can be cheaper than a company simply borrowing the money and buying the asset itself.

In Conclusion:

Asset financing is a viable option for businesses in Nigeria, especially those looking to acquire costly assets without depleting their cash reserves. By spreading the cost of the asset over a period of time, companies can avoid the burden of upfront payments and instead make manageable monthly installments. Additionally, asset financing allows businesses to preserve their working capital and maintain liquidity, which is crucial for day-to-day operations and unexpected expenses.