In the realm of business finance, acquiring assets is often essential for growth and success. Whether it’s a new piece of machinery, a fleet of vehicles or cutting edge technology, these assets play a crucial role in operations.

However, not all assets are created equal, and understanding their classification is the key to navigating the world of asset finance.

PRIMARY ASSETS
The cream of the crop
Primary assets are the most desirable from a lender’s perspective, boasting high resale value, long lifespans and minimal depreciation. These assets are fundamental to a business’s core operations and can be easily  liquidated if needed.

Some examples of primary assets include:

• Commercial real estate
  Office buildings, warehouses and retail spaces hold inherent value due to their potential for rental income and appreciation over time.
• Heavy machinery and equipment
  Construction machinery such as excavators and cranes, agricultural equipment such as tractors and harvesters, and manufacturing equipment such as assembly lines and robotics are all considered primary assets. They are essential for their respective industries and maintain their value well.
• Commercial vehicles
  Trucks, trailers and large commercial vans are vital for transporting goods and services, making them indispensable for many businesses.
• Light commercial vehicles
  Cars, utes and smaller vans used for deliveries or sales representatives are classified as secondary assets.

Due to their low risk profile, lenders are typically more willing to offer favourable financing terms for primary assets, including lower interest rates and longer repayment periods.

SECONDARY ASSETS
A step below
Secondary assets, while still holding decent value, typically have shorter lifespans and higher depreciation rates compared to primary assets. They might not be as essential to core operations but still play a significant role in a business’s day to day activities.

Examples include:

• Office equipment
  Computers, printers, servers and office furniture are necessary for administrative tasks but depreciate relatively quickly.
• Specialised equipment
  Certain manufacturing tools and machinery that are not as widely used or have a shorter lifespan fall under this category.

While lenders are generally open to financing secondary assets, the terms may not be as favourable as those for primary assets. Borrowers might face slightly higher interest rates or stricter eligibility requirements.

TERTIARY ASSETS
The underdogs
Tertiary assets are the most challenging to finance due to their low resale value, rapid depreciation and less critical role in core business operations. However they can still be essential for certain businesses and can be
financed under the right circumstances.

Some examples include:

• Technology
  IT equipment such as laptops and desktops, software licences and mobile devices are essential for modern businesses but depreciate rapidly.
• Fit-outs and fixtures
  Shop fittings, office renovations and other customisations can enhance a business’s appearance and functionality but have limited resale value.
• Specialised equipment
  Medical equipment, gym equipment and other industry specific tools fall into this category and often have a niche market and limited demand.

Financing tertiary assets often requires borrowers to provide additional documentation, demonstrate the asset’s necessity for business operations and potentially accept higher interest rates or shorter loan terms.

CASE STUDY
A growing café
Consider a café owner looking to expand their business. They plan to purchase a new espresso machine (secondary asset), upgrade their point of sale system (tertiary asset) and renovate their outdoor seating area (tertiary asset).

A lender would likely be most comfortable financing the espresso machine due to its importance in generating revenue for the cafe. The point of sale system and renovations, being tertiary assets, might require more scrutiny and potentially higher interest rates.

However, if the café owner can demonstrate how these investments will significantly improve their business and increase profitability, they may still be able to secure financing.

CASE STUDY
The tech savvy startup
Imagine a tech startup that’s rapidly growing. They need to upgrade their IT infrastructure to keep up with demand. This includes purchasing new servers, high powered workstations and software licences. These are all considered tertiary assets due to their rapid depreciation and limited resale value.

To secure financing, the startup would need to demonstrate to the lender how this investment will directly impact their revenue and growth potential. They might provide a detailed business plan, financial projections and  evidence of existing contracts or customer demand. By showcasing the value these assets bring to their business, the startup can increase their chances of obtaining favourable financing terms.

CASE STUDY
The expanding medical practice
A medical practice looking to expand its services wants to purchase a new ultrasound machine and refurbish its waiting room. The ultrasound machine is a secondary asset, while the waiting room renovations are considered tertiary assets.

The medical practice would likely have an easier time securing financing for the ultrasound machine due to its higher resale value and essential role in providing medical services. The lender might require a more detailed explanation of how the waiting room renovations will improve the patient experience and ultimately benefit the practice’s bottom line.

Why asset classification matters
Understanding the hierarchy of primary, secondary and tertiary assets is crucial for several reasons:

• Borrowing power
  Lenders use asset classifications to assess risk and determine loan terms. Knowing where your assets fall can help you anticipate the financing options available to you.
• Financial planning
  Understanding the depreciation rates of different asset classes is vital for budgeting and financial forecasting.
• Investment decisions
  Choosing the right assets to purchase can significantly impact your business’s profitability and growth potential.

You may now see how not all assets are created equal in the world of finance. By understanding the distinctions between primary, secondary and tertiary assets, you can make informed decisions about financing and investing in your business’s future.

So, the next time you’re considering acquiring a new asset, remember that its classification can make a world of difference in your ability to secure the necessary funds.

Choosing the right path
Ultimately, the decision of what assets to finance and how to structure the financing depends on your specific business needs and financial situation. It’s essential to assess the risk profile of each asset, compare different
lenders and choose a finance solution that aligns with your long term business goals.

Remember to reach out to our asset finance team to do the thorough research on your behalf and help you with the careful consideration of making informed decisions in the complex world of asset finance.

Let’s chat soon.