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Obtaining finance is extremely important for a business. Whether it’s to purchase new equipment or invest in new premises, obtaining an injection of cash into your firm can be vital to growing your enterprise.
There are many different types of business funding sources to choose from, so it is important you find the right one to suit your individual circumstances. Asset finance is one such option.
Before deciding to take the plunge, however, it is essential to understand how asset finance works, the benefits it can offer, and the different types available to you.
What is Asset Finance?
Before we explain how asset finance works, it is a good idea to first of all define what the process actually is.
Asset finance is a way of leveraging the value of assets such as buildings, vehicles and equipment. It is used by companies to grow their business without having to stump up all of the cash in one go.
The method can be utilised in a wide range of applications, these include the purchase of:
- Office equipment
There are various different types of asset finance methods available, which we will discuss in more detail later.
How Does Asset Finance Work?
Once you have selected the asset you wish to buy and agreed payment terms, the finance company will pay for the item outright and give it to you. This means you’ll have access to it right away, without having to worry about paying the full amount up front.
You will then be expected to make regular payments to the finance company, usually on a monthly basis for a fixed term. Additional fees and interest will usually be charged on top of the flat fee, so it is important to factor this into your budgeting. You will continue to have full access to the asset throughout the duration of your agreement.
Flexible payment options may also be available. For example, more seasonal industries such as construction might find it better to arrange a deal where they can pay for the item over the space of a few months – usually during their busy periods. Schools, on the other hand, will usually fare better with annual payments.
Depending on the method of asset financing you choose, responsibility for maintaining the asset will either fall on you or the finance provider. Once the agreed payment term has finished, the asset may return to the lender, or ownership will be transferred to you.
Alternatively, asset finance can also be used to unlock the value of an item you already own. Known as asset refinance, this involves transferring ownership of the asset to the finance company as a form of collateral. They will then provide you with a loan based on the asset’s value.
The Benefits of Asset Finance
The major benefit of asset finance is that it enables companies to invest in new and replacement equipment without having to release large amounts of capital upfront. This gives your firm increased flexibility in terms of cash flow, and allows for more control over available funds. Budgeting is also made extremely easy, since payments are often made at regular intervals.
There are also several benefits relating to tax, accounting, and balance sheets. This is because payments made on certain types of agreements are classed as tax-deductible business expenses, which can then be offset against gross profit. Tax relief may also be available on your investment.
Because asset finance is often secured on the equipment itself, it may be easier for you to secure the funding you need – since the lender will already have some security in the asset. As a result, this method of securing corporate funding can often be quicker to organise than other sources.
A final benefit of asset finance is that there can also be operational and administrative gains attached. Something like contract hiring, for example, can include additional services such as maintenance and fleet management. This reduces the administration burden on your business, improves productivity and also cuts operating costs.
Types of Asset Finance Solutions
As mentioned earlier, there are different types of asset finance solutions for you to choose from. Each one comes with its own benefits and drawbacks, so it is essential to do your research and decide which option best suits your own circumstances. It is also a good idea to seek specialist assistance from a business advisory firm, who can provide a holistic overview of your firm and recommend what they believe is the best solution for you.
The main types of asset finance are as follows:
Also known as lease purchase, this type of asset finance involves the lender retaining ownership of the item until the duration of the agreement has ended. The borrower will then have to make regular payments on the loan over the course of the contract, and will be given the option to take full ownership of the item with their final instalment. Should you wish to transfer ownership to you, a Purchase Option Fee will be payable. This can be as low as £1.
It is also worth noting that you will be responsible for the maintenance of the asset throughout the duration of your agreement.
Sometimes called a capital lease, this is an agreement where the lender purchases an asset on behalf of your company and rents it out to you. Unlike a hire purchase, however, there will be no option for you to take ownership of the item once your agreement has come to an end.
You will be expected to keep up with monthly payments, and take care of all maintenance and insurance requirements. Once the agreement (known as a primary rental period) has ended, you can either choose to extend the rental period, return the equipment to the lender, or sell it to a third party on behalf of the finance provider. In some cases, you may even be able to share the proceeds of the asset’s sale.
Potential advantages of finance leasing include lower monthly payments when compared to hire purchase. In addition, your repayments can also count as operating costs, meaning they can often be offset for tax purposes.
This type of asset finance is similar to a finance lease, except you will be given the opportunity to take ownership of the asset once your contract has come to an end. Like the name suggests, it is specifically used to purchase equipment.
Once the agreement has come to an end, you can either choose to extend the lease further, purchase the item outright, return it to the lender, or even upgrade it to another piece of equipment. There are several assets that can be purchased using this type of agreement, such as:
- Laptops and printers
Because equipment lease agreements are based on the depreciation of the asset’s value, instead of its full price, your monthly payments will typically be lower than if you had chosen to borrow the equipment using hire purchase. That being said, if you then decide to take full ownership of the item by making a balloon payment, it may end up being more expensive than if you had just purchased the item outright.
Unlike hire purchase and finance lease agreements, responsibility for the upkeep of the equipment rests with the lender and not yourself. An equipment lease also counts as an operating cost, so your payments can be offset against your profits for tax purposes.
Although this is similar to an equipment lease, this type of asset finance is usually used to purchase specialist plant machinery or equipment that a firm will never want to own outright. If you choose this option, you will rent the item over the short or medium term, making regular payments as you go.
One of the biggest advantages of this method is the ability to upgrade the equipment regularly, sometimes even during the rental period itself. It can also work out to be much cheaper than finance leasing, since the cost is based on the value of the equipment. In addition, the finance company will be responsible for the upkeep of the item, rather than you.
How Inquesta can Help with Asset Finance
Boasting decades of experience in providing expert business advisory services, Inquesta should be your first port of all if you are ever unsure how asset finance works. We can also assist you with deciding which form of asset finance is best for your company.
We will conduct a thorough review of your circumstances and recommend what we believe is the most appropriate course of action to take. With us, there is no hidden agenda, so you can be confident you are working with a company that has your best interests at heart.
Throughout our history, we have partnered with some of the UK’s leading commercial finance providers. We especially recommend Business Finance House, who are able to assist with all areas of funding — such as asset finance, business restructure financing, cash flow support, and more.
For more information about how Inquesta can help you, contact a member of our team today or request a no-obligation consultation.