Asset finance allows a business to acquire business-critical assets, replace ageing equipment, or expand current operations without putting additional pressure on cashflow or needing to raise a significant amount of working capital before purchase.
The product works by allowing a business to use assets on its balance sheet as collateral to fund a purchase.
Asset finance is a versatile financial product, variations of which can be used to fund purchases of everything from machines and manufacturing plant to office and IT equipment.
Small upfront costs – A major benefit to asset finance are the small or zero upfront costs for major asset purchases. This means that a business will be enjoying the benefits of the equipment straight away, without needing to acquire sufficient capital to purchase outright straightaway.
Spreading payments – Since the cost of the asset is spread out over time, asset finance supports cash flow and frees up capital that can be spent on other areas of the business.
Peace of mind – It’s often the case that the cost of maintaining an asset is covered by the finance company and not the business itself. In some cases, the finance company will replace the asset if it develops a fault during the duration of the loan period.
No additional collateral – Since the asset being purchases is the security for the finance provider, there is no need to put up additional assets. This is particularly helpful for younger businesses or those that do not possess many assets.
Expense – Asset finance can prove cheaper than other forms of business financing.
It’s important to understand the distinction between asset finance and a product called asset refinancing.
Asset finance allows you to acquire or lease an asset without the need for a big upfront payment. On the other hand, asset refinance lets you unlock the cash value of an asset that you already own.
Essentially, you can use the asset as collateral and secure a business loan from a lender.
If your business can meet its financial commitments, asset-based financing could be a viable option. This holds true irrespective of your business structure – whether you’re a sole trader, involved in a partnership, operating a limited company, or even launching a new startup.
There’s a diverse range of asset-based finance options and lenders available to cater to different needs. However, determining 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.
That’s why Business Finance Expert exists to provide independent, specialist financial support to SMEs before they decide on the right type of finance for them.
The finance provider takes on the responsibility of purchasing the asset and leasing it to a recipient business. Throughout the lease term, the lessee will make monthly repayments that encompass both the initial asset cost and the accrued interest. Additionally, the lessee is accountable for insuring and maintaining the asset. Upon reaching the end of the lease term, the lessee will have three options:
Continuation: They can opt to continue renting the asset, enabling them to sustain its usage for an extended period.
Return: If it aligns with their business needs, the lessee business has the option to return the asset to the finance provider, freeing up cashflow.
Sale: As an alternative, the lessee can facilitate the sale of the asset on behalf of the finance provider, potentially generating value and freeing up resources for their business.
Often used as a solution for leasing vehicles for commercial fleets, a process that can be time-consuming. However, with contract hire, the provider takes charge of sourcing and maintaining any vehicles you lease from them, streamlining the process.
Through this arrangement, a business can enjoy the flexibility of making payments over a predetermined lease term, ensuring predictable and manageable budgeting.
could be a viable financing option for an asset if the end goal is for the business to own the asset outright. Upon completion of the agreed repayments, the asset is owned by the lessee, providing a tangible return on investment.
Even though the lessee will be able to use the asset as soon as they purchase it, it’s important to note that until the lessee fully pays off the asset, the ownership remains with the finance provider. Whilst paying for the asset the lessee is responsible for the maintenance of the asset throughout the lease term. Furthermore, selling the asset isn’t an option until the term has concluded, unless the finance agreement permits early settlement of the contract.
A form of asset finance that allows a business to secure equipment for a specified timeframe, with the added flexibility of potentially upgrading to a more advanced model within the rental period, subject to the terms of the agreement.
One notable distinction from a finance lease is that, under an operating lease, the finance provider assumes the responsibility of maintaining the asset throughout the duration of the finance agreement. This relieves the lessee business of the burden of maintenance tasks.
Hire purchase with the main difference being that the monthly payments are designed to cover only the interest on the loan. This effectively reduces the monthly repayment for a business, making it a potentially attractive option for a business looking for lower ongoing costs. However, the final (or ‘balloon’) payment is required to fully repay the loan.
It’s important to keep in mind that while this arrangement can make monthly expenses more manageable, the total cost over the term tends to be higher. So, while it offers short-term financial relief, it’s worth considering the long-term implications before opting for this type of hire purchase agreement.