Asset finance explained: What is asset financing and when is it used?
Asset financing is a way for businesses to raise funds to buy or lease equipment so they can move forward without depleting their capital. You can use it to buy or replace assets ranging from basic office equipment to vehicles, plant and machinery, depending on the nature of your business.You can even fund ‘soft’ assets such as the installation element of a project.
This option removes a massive barrier to achieving rapid growth. It’s a flexible form of finance, offering a great alternative to taking out a bank loan. It allows you to obtain and use essential equipment without having to make a lump-sum payment upfront.
With asset finance you’re already profiting from the equipment, while making regular payments on it. This means you can keep your cash in the bank while generating extra income from your new asset.
Or you might want to use your capital to buy more stock and fulfil more customer orders. This then fuels growth and boosts your funds making it easier to manage cashflow and keep your accounts in check. And you are only investing in the assets you need.
Asset finance also enables you to release cash from the value in items you already own.
The types of asset we specialise in are
There are a number of different options, each with their own benefits, depending on your circumstances:
Hire purchase is a simple way to buy an asset and spread the cost over time.
These agreements give you immediate access to assets that you will own outright after paying all the instalments.
You may be asked to pay a deposit as well as the fixed monthly instalments for the agreed term.
Hire purchase contracts tend to last between one and six years.
Because you own the asset, you’ll be responsible for maintenance and insurance costs but you have full ownership at the end of the term.
You could opt for a straightforward leasing agreement, in which you rent the assets you need, but you won’t own them at the end of the term.
Under a leasing asset finance agreement the asset finance providers buy the equipment you need and will lease it to you for a fixed monthly sum.
You have immediate access to the equipment but without visibly borrowing money or using up your capital.
You only need a fraction of the total amount up front. You might have to pay the first month’s rent, while spreading VAT across the period.
At the end of the term, you can either continue to lease the item, or buy it outright at an agreed price. That price is likely to factor in money already spent.
You might want to upgrade to another piece of equipment on a new lease, or you could just return it.
Many businesses favour a lease arrangement because you can adapt it to your company’s situation as well as spreading the cost.
For example, if a delivery company leases a van and business is booming at the end of the term, they could then get a bigger vehicle on a new lease. Or they could get a package deal for a fleet of vehicles.
An operating lease is a rental agreement with a set term, where the customer rents an asset for part of the item’s useful life.
It’s also known as business contract hire, particularly in relation to commercial vehicles.
This option is very popular, as the customer doesn’t take on any of the risks of owning the asset because maintenance is normally handled by the lease company.
It enables you to rent equipment over a short or medium term and is usually cheaper because you don’t pay for the full value of the item.
Asset refinancing is a process of borrowing against valuable items that your company already owns.
These agreements are aimed at established businesses that have already invested in equipment, enabling them to release some of the capital tied up in those assets.
Businesses often borrow against existing assets to fund a refurbishment, new furnishings and equipment. You can even fund soft assets such as the installation element of a project.
This option is especially popular for buying medical equipment, audio visual, IT and communications equipment and installs.
It’s a less risky option. If for any reason you can’t keep up payments on the loan, the asset finance provider only takes the asset to recoup what’s owed.
Because you’re effectively ‘unlocking’ cash, the amount you can borrow depends on the value of the assets involved.
Asset-backed lending is sometimes used for debt consolidation.
Some lenders specialise in one particular area of asset refinance, while others will finance almost anything that has a resale value.
There’s a wide range of asset refinance products available and it can be a very flexible arrangement. However, there are a few restrictions. Usually the asset has to be critical to your operation and it must also be removable so it can be accepted as security for the loan.
Who is eligible?
Virtually any business owner can use asset finance to buy new equipment or release capital from assets they already own.
It’s particularly suitable for SMEs because it enables them to get the equipment required to operate, trade and grow without having to access lines of secured or unsecured credit elsewhere.
Payments are made over a fixed period, making budget planning much more manageable.
Around one in three small businesses who are using external borrowing choose asset finance because it’s such a great way of releasing cash tied up within the business.
If you’re a start-up or new business, it helps you to buy the equipment or machinery you need to begin operating before any money is coming in. It reduces the up-front costs and breaks down purchases into affordable monthly repayments. Most start-ups will take advantage of this to aid cashflow.
What if a business is currently operating at a loss but is asset rich? Not a problem. Asset finance could well be the answer. You could refinance an asset to unlock its capital and free up your cashflow. Or you could use it to invest in new equipment you may urgently need.
Please don’t be put off it you’re worried you might be ineligible. That’s where a broker comes in. Just give us a call to talk it over.
There’s no cost for an initial chat and no obligation to take things further. We’ll just find out a bit more about you and your business and work out the best option for you.
What you should consider
COMPLEXITY: Navigating your way through the different forms of lending banks and companies have to offer can be over-facing. Our job as commercial finance brokers is to sort out all the fine details so you don’t have to stress. We’ll make sure the option you choose is the right one for you and your business.
STABILITY: Asset finance can be a fast, easily-accessible and cost-effective way to improve cashflow and provide stability through periods of income fluctuations.
RISK: If there’s any danger of defaulting on your asset finance agreement, you would only lose the asset but wouldn’t be personally liable with your home or other property at risk.
TAX BENEFITS: Using asset financing to lease machinery, equipment or vehicles can also be a useful tax-saving device. Any lease payments can be offset against profits, because they count as business expenses. On the other hand, it’s worth bearing in mind that you won’t be able to deduct the value of equipment funded through asset finance from your profits for tax purposes.
COSTS: Asset financing is generally more expensive than buying an item outright, which means it’s important to make sure you aren’t overpaying.
TIMEFRAME: As with any type of finance, it’s important to consider the timeframe, to make sure you’re only paying for what you need. With finance leases and hire purchase agreements in particular, you don’t want to be stuck making payments on an asset you no longer use.
As your broker we’ll work through these considerations with you to ensure all the arrangements are right for you.
What fees are involved?
Most agreements come with fixed interest rates. This means you can anticipate what you’ll be spending over the next few years, making it easier to plan budgets ahead.
Rates are currently from 4.8% APR (Subject to application.)
Use our calculator to work out your monthly payments.
A deposit or advance payment may be required to get approval for asset-based lending.
Documentation fees are charged with the first payment,
Under a hire purchase agreement, a purchase fee is payable with the last instalment as you take ownership of the asset.
How long does it take to get approval?
This type of finance deal is usually agreed much more quickly by lenders, often within just a few days.
This means quicker delivery of machinery, vehicles and equipment.
That factor is particularly attractive to start-ups who want to begin operating as soon as possible to bring in funds to the new business.
Choose your loan amount, and your term to find out how much your repayments could be according to your credit score*
*All figure subject to application.
Alternatives to asset finance
If asset finance isn’t right for your current circumstances, your broker will work with you to identify an appropriate alternative.
You might benefit from taking out a business loan. This option also benefits from quick decisions, sometimes within just 48 hours. It offers fixed rate monthly repayment s over 1, 3 or 5 years.
At ABL Business we have access to over 150 lenders who will provide up to £500,000 unsecured funding for your business.
If the asset you want to buy is a vehicle, we also specialise in car finance. We’ve helped a number of entrepreneurs to purchase their dream vehicles.
Just give us a call on 01274 965 356 for a no obligation chat about the options available to you.