Asset Finance Explained
What is
asset finance?
If you'd like to grow your business but don't have the money needed to scale your operations, asset finance can be one way to raise funds. It enables you to spread the cost of equipment, machinery and other assets you may need.
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Asset finance is a way of leasing equipment, machinery or vehicles or other assets you need to scale your output. If you don't have cash to buy these assets outright, you can pay for them in fixed instalments over a set period of time, usually with the option to buy them at the end of the contract.
How does asset finance work?
Here's an example. James runs a successful bakery. He would like to start supplying nearby cafes so to earn more, he needs to bake more. His current ovens are only big enough to fit all his current buns, so he needs a new one. James, however, cannot afford to buy one outright at the moment, so he arranges asset finance to pay for the oven in monthly instalments, with some added interest.
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In short, it's very much like the finance deals available when people buy a car. The only real difference is that in this example, it's a business asset, so you can claim allowances for it, and it also has the potential to increase business growth. If James' plans are successful, his new oven should end up paying for itself, because his business will expand as a result.
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Once James' bakery is earning additional income from the cafes he supplies, he can decide whether to extend the lease or pay an additional sum to buy the equipment. However, if the expasion plan doesn't pay off, James can simply give the oven back and stop paying for it. It's worth looking for plans that offer this kind of flexibility.
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What are the different types of asset finance?
There are a number of agreements available for spreading the cost of your equipment. Here's a quick overview.
Hire Purchase
You pay a chunk at the start of the agreement followed by smaller payments. You’ll be responsible for upkeep of the asset during the contract. Once the agreement ends, you can choose to pay a ‘balloon’ payment to buy the asset outright or hand it back and walk away.
Finance Lease
With this agreement, you don’t have the option to buy the asset at the end of the contract. Instead, the lender buys the equipment and is responsible for its maintenance, and you rent it off them.
Equipment Lease
This contract is similar to a finance lease, but it is more flexible. You hire the item from the lender, but at the end of the agreement you can choose to extend the contract, upgrade the asset, buy it for a balloon payment or hand it back.
Operating Lease
​You also hire the item with this contract, but the payments are based on the value of the item during the time you’re using it, rather than its total value. It is designed for businesses that don’t intend to buy the equipment and only need it for a known amount of time, usually short-term.
Asset Refinancing
This funding is similar to a secured loan, but you only partially own the item. When you are buying an item over a series of payments, you will build up equity as you pay off the outstanding balance. Asset refinancing lets you use this equity as security against a loan.
What kind of items can you get through asset finance?
'Hard' or 'Soft' goods can be financed via asset financing through loans or purchases. Hard items are tangible possessions that can be sold for a high price, such as machinery, trucks, and equipment. Soft goods, such as software, CCTV, and cash registers, however, lose value after usage and may be more challenging or even impossible to resell.
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Some lenders base their decision on the 'DIMS' criteria, which states that an object must be durable, identifiable, movable, and saleable in order to qualify for financing.
What are the advantages of asset finance?
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Scale up immediately - Asset finance lets you use or buy the equipment you need to scale before having to save up for it.
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Fixed payments - You'll know exactly what you're paying each month, making it easy to budget.
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Flexibility - Depending on the agreement you choose, you often have a few options at the end of the contract.
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Less responsibility - If you hire the equipment, the provider is responsible for maintenance costs., though you will be liable for damage and might need to take out business insurance. Also, they have to bear the costs of value depreciation.
What are the disadvantages of asset finance?
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Interest - You will be charged interest, but the rate is generally fixed.
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Approval - Your business will need to pass the lender's criteria to take out the finance.
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You may never own the item - It might not make financial sense to pay for an item that doesn't become a business asset.
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Potential for disruption - If you can't meet the payments, you might have to return the item, which could seriously harm your operations.
What is an asset finance broker?
Before deciding whether or not to use an asset financing broker, it's critical to comprehend what they do and the advantages of using one.
An asset finance broker is a person or business that helps clients find the best lender to meet their needs in order to purchase assets from suppliers.
Brokers don't typically work with a single financial provider; instead, they use their market knowledge to find the best offers for each client. While some brokers charge their clients up-front fees, others operate on commission.
Why use an asset finance broker?
Depending on the company, the assets they require are usually a significant upfront cost; asset finance offers the flexibility to spread the cost and therefore support cashflow.
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An asset finance broker will be able to find the best price while saving the client time dealing with lenders. As a result, repayments should be less, and the client can focus on expanding their business.
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What's right for one company may not be appropriate for another. Brokers need to get a full understanding of their client's requirements to source asset funding that is right for them. One way in which brokers do this is by looking into which type of financial option will work for their business circumstances.
Common misconceptions surrounding asset finance
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 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 may be its useful economic life.
You can only use asset finance for large purchases.
You can fund any asset from £1,000 upwards. It doesn't matter if it is IT software, machinery or an addition to your vehicle fleet.
Asset finance is expensive.
Not necessarily, you will have the equipment you need immediately. The cost of not having the equipment you need could be far higher; if you can't win or compete for business-critical contracts that are therefore won by your competitors, this means you don't grow as a business but they do. It wouldn't be the first time a small company has beaten it's larger competitors to contracts simply because they committed to the equipment needed to fulfill a potential client's specific needs when the larger rivals would not.