Definition of Asset Finance
Asset finance is a type of lending used by businesses to gain access to hard assets such as machinery, vehicles and equipment, and soft business assets such as software, office fittings, and training. It spreads the cost of acquiring such assets, giving you access to new kit when you need it. A benefit is that the profit gained by your business whilst using the asset may offset the monthly cost! It can also enable businesses to release cash from the value in assets they already own.
How Asset Finance works
Asset Finance is a commercial arrangement where the customer will select an asset, the finance company will purchase that asset and the customer will have use of that asset during the lease. The customer simply pays a series of installments for the use of the asset for the duration of the agreement. What happens at the end depends on the type of the agreement, we will cover that in more detail a bit further on.
Why use Asset Finance?
Paying cash up front for business assets can be expensive and potentially risky for cash flow. This is where asset finance can help by spreading the cost of the purchase over a number of years in fixed monthly payments. This also leaves your cash reserves untouched and available for other areas of your business, enabling you to plan ahead financially. Large companies often use this method of funding for large purchases, because using the asset itself can generate profit to offset the monthly cost.
What businesses use Asset Finance?
Asset Finance is suitable for all types of businesses including Limited Companies and Sole Traders.
How to get financing for a business
The first thing you need to establish before approaching a broker or lender is the equipment or asset your business requires and its rough value. This could be in the form of a quote from a supplier.
Traditionally, businesses have approached their principal bank and then only approached an alternative lender if their application is rejected or if the rate offered is high.
What is a Lease?
A business lease is a type of lease in which a finance company is typically the legal owner of the asset for the duration of the lease, while the lessee not only has operating control over the asset but also has a substantial share of the economic risks and returns from the change in the valuation of the underlying asset.
Why Choose a Lease for Asset Finance?
Leasing helps businesses keep ahead of the game by giving them access to emerging technology and equipment to maintain their competitive edge. Businesses can quickly gain up to date equipment whilst spreading the cost, meaning they can retain their capital to invest in other areas of the business. Leasing also helps businesses to manage their cash flow, forecast and plan ahead. Equally, Leasing can provide a safety net if business critical equipment needs replacing quickly. For example, if a caterer’s oven was to break, they would be able to replace it quickly and continue business as usual.
Can second-hand equipment be financed?
Yes, businesses can acquire second-hand assets such as refurbished equipment using a finance agreement. Different lenders have different terms for these agreements, meaning that working with an experienced broker will save you time as they will only speak with appropriate lenders.
Hard vs Soft Assets
In order to fully understand your asset finance options, it’s important to first understand the difference between hard and soft assets.
What is a Hard Asset?
A Hard Asset is defined as a tangible item, such as a vehicle, that has a resale value at the end of the agreed term. Other Hard Asset examples would include machinery, plant, and manufacturing equipment.
What is Hard Asset Finance?
Hard Asset Finance is an agreement between a customer and a lender. The lender pays for the asset in full so that the customer can spread the cost of repayments over up to ten years depending on the asset and its value. The exact terms of the agreement depend on the type of funding. These are explained a little further on.
What is a Soft Asset?
Soft Assets are differentiated from Hard Assets because they are often intangible and have little or no resale value; a good example of this is software. Soft assets can also include items such as paint, office chairs, fixtures and fittings for projects such as refurbishments.
What is Soft Asset Finance?
Soft Asset Finance is similar to Hard Asset Finance in that the bank or funder purchases the items required by the customer who then pays the bank or funder in fixed instalments over an agreed term. Soft Asset Finance is not offered by every bank or lender because there is often no tangible asset that can act as security.
Types of Asset Finance
Additionally, there are a number of different kinds of asset finance.
Let’s take a look at each of these in turn.
What is Hire Purchase?
This is legally an agreement to hire with the option to purchase at the end of the agreement. Spread the cost of a purchase over time by paying in instalments. The item appears on your company balance sheet and you are immediately responsible for maintenance and insurance costs. At the end of the purchase agreement, your business owns the asset.
What is Sale and Leaseback?
Sale and Leaseback allows a business to sell an asset that it owns to a funder in return for cash, but the funder then leases the asset back to the business over an agreed term for an agreed cost. This is a simple answer for asset rich, cash poor businesses as they can unlock capital tied in existing assets by effectively selling equipment, whilst remaining its sole user, freeing up cash for other areas of the business. An advantage of Sale and Leaseback is that an agreement can be set up quickly as the asset itself acts as the security.
What is a Finance Lease?
A Finance Lease allows businesses to spread the cost of the full value of the asset over time, giving full use of the item without technically owning it.
What is an Operating Lease?
An Operating Lease is a sophisticated arrangement that affords businesses the benefits of using the equipment whilst the lender takes the burden of ownership and the risk in its resale value.
What is Vehicle Contract Hire?
With Contract Hire, businesses can enjoy full use of the asset over the hire agreement without the responsibility of ownership. Simply return the asset at the end of the agreement. This is a popular choice for vehicles.
Funding options made simple
Knowing which finance option is best for your business and the asset you are looking to fund can be a daunting task.
To help with the decision, we’ve put together this simple guide which summarises the main differences between finance options. We understand though that everyone’s circumstances are different, so we would always recommend speaking to our experienced team for tailored advice.
Common Misconceptions Surrounding Asset Finance
There are a number of myths out there concerning asset finance. Let’s take a look at just a few.
Only large companies use Asset Finance
This is a popular misconception driven by the belief that lenders will only advance money to businesses that don’t need it. Any business from a start-up through to SME’s and large companies whose shares are traded on the stock exchange use funding to expand their business. The important issue to the lender is that the company they lend to has the ability to repay them.
Asset Finance is for businesses that can’t afford to pay upfront
Not true – It’s is a way for businesses to acquire the equipment it needs today and pay for them from the cash flow generated by them. Using finance allows you to retain current working capital and fund expansion in terms of manpower and materials.
It is better to buy equipment outright rather than use Asset Finance
Using Asset Finance allows you to acquire the business-critical equipment that you need with minimal cash outlay, and allows you to pay off the funding over what maybe its useful economic life.
Asset Finance is expensive
Not necessarily, you will have the equipment you need immediately. The cost of not having the equipment could be far higher; if you cannot win or compete for business-critical contracts that are therefore won by your competitors meaning you do not grow as a business but they do. It wouldn’t be the first time a small company has beaten its larger competition to contracts simply because they committed to the equipment needed to fulfil a potential client’s specific needs, where the larger rivals would not.
Would you like to find out more?
Why not contact LoanGuru today?
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