Asset finance explained.

The UK asset finance market reached a new record in 2018 with almost £33 billion provided to businesses in the form of asset finance.

There has been a surge of businesses choosing to use asset finance instead of purchasing equipment outright in recent years.

In this article, I explain what asset finance is and the pros and cons of using this type of finance for capital expenditure (Capex).

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 rent it back to you for a certain period.

Who is asset financing for?

Absolutely any business of any size that is looking to purchase high value 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 it’s usable life.

Types of asset finance

There are 3 different types of asset finance - Hire Purchase, Finance Lease and Operating Lease:

Hire Purchase

With Hire Purchase, the business leases the asset for an agreed period with regular, fixed monthly payments.

The asset is owned by the asset finance provider, and they are responsible for insuring and maintaining it.

At the end of the leasing period, the business takes ownership of the asset.

A Hire Purchase agreement will usually allow for the flexibility of a ‘balloon’ payment to be structured; a way of reducing the monthly payment by agreeing on a large final payment at the end of the leasing period (it takes into account the residual value of the asset at the end of the leasing period).

Good for: Any business that wants to spread the cost of equipment over it’s usable life and ultimately wants to own the asset outright.

Finance Lease

There are two main differences between a finance lease and hire purchase.

Firstly, during a finance lease, the business is given full ownership and responsibility of the asset (so must insure and maintain it etc).

And secondly, the business is never given the opportunity to own the asset, even at the end of it’s usable life.

Other than this, it works very much like an HP agreement; the asset finance provider leases the equipment to the business for a fixed period, with the business making regular payments for the use of it over this period.

Good for: Any business that wants to spread the cost of equipment over it’s usable life but doesn’t want to own the asset outright.

Operating Lease

With an operating lease, the base rental costs are calculated on the value of the asset over the period you’ve agreed to lease it - not the full value of the asset, which significantly reduces the rental cost.

The business usually owns the asset for the period of the lease.

Good for: Businesses that will not need the asset for the entirety of it’s working life, only to service a new or existing contract the business has.

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 and IT hardware
• Office furniture and refurbishment
• Commercial kitchen and refrigeration equipment
• Audio visual and media 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
• Machinery
• Cars and vans
• Printing
• Agricultural and forestry equipment

Refinance

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 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.

There is a lender willing to refinance just about asset, of any age up to a maximum of 90% of it’s value - subject to professional valuation.

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 it’s usable life, increasing the amount of working capital available at any point in time.

Little or no security

In most cases, the asset being funded is enough security for the lender to agree to lease it back to you.

You are very rarely expected to provide personal guarantees, but it is not completely unheard of.

Depreciation and unexpected costs

In most cases, you are not the owner of the asset and therefore avoid the impact of any unexpected loss or failure of it (needing to pay for a replacement earlier than planned).

Disadvantages of asset finance

Asset finance has many advantages, but like any form of funding it does have it’s limitations.

Lack of ownership

Asset finance provides no long term ownership of the asset to the business.

If you are purchasing the asset in cash or with a business loan, you obviously gain ownership of the asset in doing so.

It can be more expensive than buying the asset

Asset Finance is more expensive than using your own funds to support an outright purchase due to interest and any associated service charges.

You will probably have to pay a deposit or make some payments in advance

Depending on the product, you may need to make a deposit or pay the first month's payment upfront (subject to negotiation).

Are you looking to finance machinery or equipment? Contact us today for 100% free advice and support.