Asset Finance
Asset finance is a type of finance used to obtain assets such as equipment, machinery and vehicles. It usually involves paying a regular charge for use of the asset over an agreed period of time, thus avoiding the full cost of buying outright. The finance can also be used to release cash from items already owned.
Types of Asset Finance
There are several different types of asset finance most commonly being:
Hire Purchase
Hire Purchase allows you to pay for an business asset over a set period in installments, and on completion of the agreement the asset ownership transfers to you. The asset can be shown on the balance sheet from signing of the agreement, but you cannot sell the asset during the term of the agreement without the agreement of the HP company.
Finance Lease
The finance provider buys and holds ownership of the asset with a finance lease, essentially renting it to you for a set term. Your payments to the provider cover the original cost of the asset, as well as any interest due. Additionally you are accountable for insuring and maintaining the asset.
On expiry of the term, you have a couple of options, either continue renting the asset, or return it to the finance provider. They may sell the asset on, and you may receive a portion os the sale proceeds as a ‘rental rebate’.
Equipment Lease
Similar to finance leasing, equipment leasing allows for the option to own the equipment at the end of the contract. You rent the equipment from a leasing firm over a set period, making regular payments for its use. whilst the leasing firm remains responsible for the maintenance of the equipment. At the end of the contract, you can extend the lease, return the asset, upgrade the item, or buy it outright by making a balloon payment.
As equipment lease agreements are based on the depreciation of the asset rather than purchase price the monthly payments will be typically less than hire purchase.
Equipment leasing can offer potential tax advantages and it tends to suit early-stage companies that don’t have enough working capital to invest in their own assets and established SMEs seeking to upgrade their equipment.
Operating Lease
An Operating lease is generally used for specialist plant or equipment where the company does not want to own the asset, and it is only required for a specified timeframe. There is the flexibility to trade-up the asset within the rental period subject to the terms of the agreement.
An operating lease could work out cheaper than a finance lease as the cost is based on the value of the equipment, but over a much shorter period. A further benefit is that the company that rents you the equipment is responsible for its maintenance, unlike a finance lease.
Asset Refinance
Asset refinance allows you to free up cash from assets in your business that you already own.
This can be take the form of collateral for a loan or via an sale and lease back arrangement. Basically, you transfer ownership of the asset to the new lender but keep using the asset, paying them monthly.
The types of assets used as security for asset refinancing include things like machinery, equipment, vehicles, or commercial property.
The amount a lender might offer you depends on; the type of asset, its condition, its age, and the percentage of the asset owned, whilst the term will depend on the working life of the asset used as security.
Advantages & Disadvantages
There are a number of considerations to be borne in mind before choosing Asset Finance, both positive and negative, and whether it is a right fit for your business.
Advantages
- Spread the cost of the asset over a fixed term, either over the expected lifetime of the asset or an agreed timeframe suitable to borrower and lender.
- Cashflow will be freed up for other business purposes
- Upfront costs minimal. There will be a relatively small upfront cost/fee for a major asset purchase.
- The asset acts as security for the borrowing, no additional collateral (premises etc. required).
- Lessor is responsible – Some forms of Asset Finance (Equipment and Operating Leasing) the lessor will be resposible for the maintenance of the asset.
- Asset Finance can be simpler to arrange and cheaper than some other forms of finance.
Disadvantages
- Ownership -The Finance company will own the asset until it is paid for in full, or (depending on finance chosen) may never over the asset.
- Asset Limitations – The provider may insist on placing limits on the use of the asset, i.e. annual mileage limits on a leased vehicle.
- Damage Liability – The business may be liable for damage the asset sustains beyond what’s agreed in the contract whilst it’s still owned by the finance provider.
- Asset Finance is not short term – minimum contracts are likely to be at least a minimum of twelve months.
- Repossession – Failing to keep up with repayments or adhering to the terms of the agreement could result in the finance provider repossessing the asset.
FAQs
What type of Assets can be funded?
Asset finance is a very versatile product, variations of which can be used to fund purchases of everything from machines and manufacturing plant to office, IT equipment, to vehicles and commercial plant.
What costs need to be considered?
Will need to factor in arrangement fees and possibly option to purchase fees. For significant or bespoke assets there may be a valuation fee. As stated above title of the asset remains with the lender and this can be repossessed if certain conditions are breached.
What type of businesses are eligible?
If your business is capable of meeting its financial commitments, asset-based financing could be a viable option for you.
Asset finance can be considered for sole traders, partnerships, limited companies, or even startups.
There’s a diverse range of asset-based finance options and lenders available to cater to different needs.
Next Steps
Trying to find the most suitable type of asset finance, identifying the lowest interest rates, and finding the perfect lender for your specific business circumstances can be a labour-intensive and time-consuming process.
Therefore it’s a good idea to seek independent, specialist financial advice before deciding on the right type of finance to apply for.
For an initial no obligation call or meeting, please contact us to arrange.