Asset Finance Explained
As a result of these unprecedented times; SME businesses are receiving lots of support including from government backed schemes such as the Recovery Loan Scheme.
Asset finance opportunities may also offer crucial lifelines for small and medium-sized businesses. We explain what Asset Finance is and why it is a viable funding solution for SMEs.
Asset finance explained
Asset finance facilities may offer crucial finance for small and medium-sized businesses. We explain the features and benefits of asset finance below.
What is asset finance?
Asset finance is used by businesses to buy the equipment they need to grow.
By ‘equipment’, I include things like plant, machinery and vehicles – any asset of significant value that is used in the day to day operation of your business.
The asset finance provider will basically purchase the equipment for you and then lease or hire it back to you for a certain period.
Who is asset financing for?
Absolutely any business of any size that is looking to purchase equipment.
You may not have the cash available to purchase the asset outright, or you may want to spread the cost of the equipment over its usable life, using your saved capital elsewhere.
Types of asset finance
There are two main forms of asset finance – Hire Purchase and lease rental:
With Hire Purchase, the business finances the asset for an agreed period with regular, fixed monthly payments.
At the end of the agreement, the business takes ownership of the asset. Hire purchase is a balance sheet transaction.
The VAT is paid upfront along with any deposit. A balloon payment can be factored in as well for vehicles to reduce the repayments.
Good for: Any business that wants to spread the cost of equipment over its usable life and ultimately wants to own the asset outright. Generally used for higher-value assets such as engineering equipment and vehicles, plant, machinery and so on.
Leasing is similar to hire purchase in that the cost of the equipment is spread over a pre-agreed period of time, usually between 1-5 years.
Leasing is an off-balance sheet transaction and may be beneficial in terms of tax relief, offsetting the repayments against your future, taxable profits.
Repayments are fixed for the duration of the agreement so makes for ease of budgeting.
Good for: Any business that wants to spread the cost of equipment over its usable life but is less concerned over ownership.
What assets can be financed?
Pretty much any asset can be financed provided they meet a basic criteria of being durable, identifiable, moveable and saleable.
Although it is fair to say that in recent years, asset finance providers have pushed the boundaries in terms of what assets they consider fundable.
They have moved into a number of specialist markets such as agriculture, renewable energy, marine, aviation and technology and are funding assets that historically would not have been considered appropriate for asset finance.
Soft Assets – Equipment with limited resale value
- Audio visual
- Office furniture and refurbishment
- Commercial kitchen and refrigeration equipment
- Medical equipment
- IT hardware and software
- Shop fittings and EPOS equipment
- LED lighting and control systems
Hard Assets – Equipment with an easily defined value
- Buses and coaches
- Commercial vehicles
- Construction plant
- Cars and vans
- Agricultural and forestry equipment
Refinancing offers you the best of both worlds; you can still use the asset in question at the same time as capitalising on a cash injection straight into your business.
By refinancing assets you already own, you can fund a range of projects that would not easily be financed by other methods, such as acquiring another company, buying out a business partner or generating cash to fund improvements to your work environment.
Most assets can be refinanced depending on the age, current value and other factors.
Advantages of asset finance
Asset finance offers several advantages over acquiring equipment with cash or traditional forms of finance such as a business loan.
Frees up capital
You avoid having to pay up-front for the equipment, freeing up capital that can be deployed elsewhere.
Improves cash flow
You spread the cost of the asset over its usable life, increasing the amount of working capital available at any point in time and lets the equipment pay for itself.
Little or no security
In most cases, the asset being funded is enough security for the lender.
You are rarely expected to provide personal guarantees, but it is quite common for newer start businesses.
Asset finance in all its forms is great tool for any business looking to expand or improve its infrastructure.
At Newable Finance, we have highly experienced industry experts who can guide you on the best way to finance an investment, backed-up with a diverse panel of lenders covering most circumstances.
Or Contact us today for free advice and support.
You can also find out more about the government Recovery Loan Scheme!