Asset finance
Asset finance: definition
Asset finance is a type of lending that gives you access to business assets such as equipment, machinery and vehicles, or enables you to release cash from the value in assets you already own.
Asset finance includes:
Asset finance is a broad category that relates to valuable items in your business. Generally speaking there are two types of asset finance — lending secured against existing assets, and equipment finance to get additional assets.
An ‘asset’ can be almost anything, whether it’s ovens and refrigeration for a catering company or a haulage firm’s fleet of vehicles — and with a wide choice of alternative lenders across the market, you can find asset finance for almost anything.
Asset finance to get new assets and equipment
Paying cash up front for brand new equipment or machinery can be expensive, and could be a risky move that causes cash flow problems. And some companies simply don’t have the working capital for a big purchase — that’s where equipment finance comes in.
Hire purchase is a simple way to purchase an asset and spread the cost over time. You pay in instalments, which means the item appears on your balance sheet, and because you own the asset you'll be responsible for maintenance and insurance costs — but you'll also have full ownership of the item after the term ends.
The lender buys the asset you need, and rents it to you on a lease. That means you have it straight away, and only need a fraction of the total amount up front. Generally, you have to pay the first month’s rent, spreading the VAT over the whole period. At the end of the lease, you can either continue leasing the item, buy it outright at an agreed price (factoring in money already spent), upgrade to a new piece of equipment on a new lease, or simply return it.
Many businesses find leasing a good arrangement because as well as spreading the cost over time, you can adapt to your company’s situation. For example, say a delivery company leases a van, and at the end of the term business is booming — they could get a larger vehicle on a new lease, or a package deal for multiple vehicles.
Finance leases and capital leases
A finance lease, or capital lease, falls somewhere between hire purchase and equipment leasing. It's a longer-term lease designed for most of the asset's life.
You get full use of the asset and pay for the full value over time, but don't technically own it — so it does not appear on your balance sheet. That means it's possible to offset rental costs against profit and claim VAT — which could be tax-efficient depending on your situation.
Operating leases, or contract hires, are a more familiar form of equipment leasing. An operating lease is basically a rental agreement with a set term, and maintenance will normally be handled by the lease company (or 'lessor'). Like finance leases, an operating lease won't appear on your balance sheet (which might confer some tax benefits), but operating leases can be cheaper because you don't pay for the full value of the item.
Asset refinancing
Asset refinancing is the process of securing a loan against valuable items that your business owns, like buildings, vehicles or equipment. It’s a simple idea — if you can’t keep up payments on the loan, the lender takes the asset to recoup what’s owed.
Because you’re effectively ‘unlocking’ cash, the amount you can borrow depends on the value of the assets involved. Asset-backed lending is sometimes used for debt consolidation.
Some lenders specialise in one particular area of asset refinance, while others can finance almost anything that has a resale value. There’s a wide range of asset finance products available, and it can be a very flexible arrangement. However, there are a few restrictions: usually the asset has to be critical to your operations, and it must also be removable so it can be taken as security for the loan.
Final thoughts
Asset finance is an area with lots of choice, whether you’re unlocking cash from items you own, or getting new equipment for your business. As with any form of finance, it’s important to bear in mind the timeframe, to make sure you’re only paying for what you need. And for finance leases and hire purchase particularly, you don’t want to be stuck making payments on an asset you no longer use.
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