Article – What is Asset Finance?
Asset finance uses a company’s assets as collateral to fund a purchase or get a loan. This may include short-term investments, inventory, and accounts receivable from the balance sheet. This allows businesses to fund things such as critical assets, replace aging equipment, or expanding current operations. They are usually used to purchase or lease high-value items.
Hard Assets
High valued items to continue business operations, provide strong security for lenders. Commonly include things such as machinery, equipment, vehicles, and building premises.
Soft Assets
Items that have little/no saleable value at the end of term. Includes things like computer hardware/software, office furniture, CCTV, and tills.
What are the Types of Asset Finance?
Finance Lease
The finance provider has the responsibility of purchasing the asset and leasing it to another business. Through the lease period, the borrower makes monthly repayments including both the initial asset cost as well as the added interest. The borrower is also responsible for insuring and maintaining the asset.
At the end of the lease term, the borrower has 3 options:
- Continuation – option to continue renting the asset, so sustaining usage for an extended period.
- Return – If it aligns with their business needs, the borrower has the option to return the asset to the finance provider, freeing up cashflow.
- Sale – the borrower can start the sale of the asset on behalf of the finance provider, which can potentially generate value and freeing up resources for their business.
Operating Lease
An Operating lease is a type of asset finance which allows a business to secure equipment for a specified timeframe. However, they receive added flexibility to potentially upgrade to a more advanced model within the rental period. Like an equipment lease, but more short-medium term. An operating lease is different from a finance lease as the finance provider assumes responsibility of maintaining the asset throughout the duration of the finance agreement.
Contract Hire
Often used for leasing vehicles for commercial fleets which is beneficial because no large upfront payment is charged when compared to buying them. It is an agreement for a vehicle to be leased for a set period at a fixed cost, where the vehicle remains property of the lender, so will likely impose mileage limits. This is a great option for businesses as sourcing, maintenance and service charges are generally covered by the lender, or a fixed maintenance fee is paid monthly.
Hire Purchase
This is a great financing option for a business if they wish to own the asset outright at the end. Upon completion of the repayments, the asset is then owned by the lessee, providing a tangible return on investment. The ownership remains with the lender right up until the point where the asset is fully paid off by the lessee. While the lessee is paying for the asset, they are also responsible for any maintenance costs that occur through the term.
Business Contract Purchase
This is similar to hire purchase; however, the lessee only pays monthly interest payments, with the large payment at the end. This is popular with businesses looking for lower regular costs to make expenses more manageable. While this is beneficial for the most part, this type of asset finance is usually more expensive in the long run which needs to be considered.
What are the Benefits of Asset Finance?
Low Upfront Costs
A benefit to using asset finance is the minimal upfront costs required for major purchases. This results in businesses being able to acquire and benefit from equipment quickly without preparing for any large sum payments straight away.
Longer Payment Terms
Due to the long-term nature of asset finance, the cost is generally spread over a long period of time, freeing up capital and supporting a business’s cash flow.
Peace of Mind
It is common for the lender to be in control of the maintenance and repair of the asset, or even replacing it during the duration of the loan. This rules out any uncertainty or unwanted fees that may emerge.
No Additional Collateral
Due to the asset being purchased being the security for the lender, there is no need to place additional items at risk. This is beneficial for companies who do not own many assets.
Financing
Asset finance is generally cheaper than many other forms of business financing
What are the Risks to Using Asset Finance?
Ownership
Due to the lender owning the asset until it has been paid for in full by the borrowing business, there might be restrictions and limits on the use of the asset. For example, annual mileage; any deviations may result in fines/penalties.
Damage
In addition, if any damage occurs to the asset while it is still owned by the lender, the business may be liable beyond what is agreed beforehand.
Longer Term
It is common for the term of an asset finance agreement to last over a year, and sometimes even longer – this is a long-term commitment for a business.
Defaulting
The failure to keep up with repayments or going against the terms of agreement can result in the lender repossessing the asset. This could also have negative repercussions on a business’s credit score.
Eligibility
To be eligible for asset finance, your business must have a good record of meeting its financial commitments. This is applicable to all business structures, i.e. sole traders, partnerships, limited companies, and even new start-ups.
There are a wide range of options of asset finance for businesses to choose from, supplying many different needs.
Contact Us – The Best Finance Group
If you have any questions or are interested in using asset finance (or any other form of business finance), our dedicated and knowledgeable team are here for you. We will help you select the most suitable type of asset finance, with the lowest interest rates, from our vast panel of Asset Finance Lenders.
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