Asset finance is a form of funding that provides you access to business assets like instrumentation, machinery and vehicles, or allows you to release money from the worth in
assets you already own.
Asset finance includes:
- Equipment leasing
- Hire purchase
- Finance leases
- Operating leases
- Asset refinance
Asset finance is relatively broad and relates to valuable things in your business.
Generally speaking, there are 2 varieties of asset finance — borrowing secured against existing assets, and equipment finance to bring in new assets.
An ‘asset’ may be virtually anything, it could ovens and refrigeration for a catering or events company or a logistics firm’s fleet of vehicles — and with a good alternative of other lenders across the market, you’ll be able to realize plus finance for pretty much something.
Paying money up front for spanking new equipment or machinery may be high-priced, and will be a risky move that may cause short term cash flow issues; some corporations merely don’t have the funds for a large and necessary purchase — that’s where asset finance comes in.
Hire purchase is an efficient way of purchasing assets and alleviating the cost over time.
You pay in instalments, which means the item appears on your balance sheet, and because you own the asset you’ll be responsible for maintenance and insurance costs — but you’ll also have full ownership of the item after the term ends.
The funder buys the asset or equipment you need and rents it to you on a lease.
That means you’ve got it instantly, and pay a fraction of the overall cost upfront.
Generally, you have to pay the first month’s rent, spreading the VAT over the whole period. At the end of the lease, you can either continue leasing the item, buy it outright at an agreed price (factoring in money already spent), upgrade to a new piece of kit on a brand new lease, or simply return it.
A finance lease, or capital lease, falls somewhere between hire purchase and equipment leasing.
It’s a longer-term lease designed for most of the asset’s life.
You get full use of the asset and pay for the full value over time, but don’t technically own it — so it does not appear on your balance sheet.
That means you could offset rental costs against profit and claim VAT — which may be tax-efficient depending on your circumstances.
Operating leases, or contract hires, are a more well known in the realms of equipment leasing. An operating lease is quite simply a rental agreement with a set term, and maintenance will normally be handled by the lease company (or ‘lessor’). Like finance leases, an operating lease won’t appear on your balance sheet (which might bring about some tax benefits), but operating leases can be cheaper because you don’t pay for the full value of the item.
Asset Refinancing or Sale & Lease Back
Asset refinancing is the process of securing a loan against valuable items that your business owns, like Vehicles, Machinery or equipment. Basically, if you can’t keep up payments on the loan, the lender takes the asset to recoup what’s owed.
In some instances it can be known as Sale & Leaseback because you’re essentially ‘unlocking’ cash, the amount you can borrow will be based on the value of the assets involved. Asset-backed lending is sometimes used for debt consolidation, but can also be used for working capital in situations where it may be more beneficial.
Some lenders specialise in one particular area of asset refinance, while others will finance almost anything that has a resale value including some intangible or soft assets such as website builds. There’s a wide range of asset finance 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 operations.