Getting finance for your business is no longer just a case of approaching your high street bank manager and asking for a loan. The market is now much more varied, and boasts a huge range of products which have been tailored for more specific purposes. This means it’s easier than ever to find funding that fits your business – if you know where to look.
Asset finance is one such funding solution, but what exactly is asset finance and is it a good option for your business?
A brief overview of Asset Finance
Asset finance is a catch-all term and there are various finance solutions that come under this heading, so the difficulty comes with understanding what funding is available and which would be best for you.
Put simply, asset finance relates to the physical assets of value in your business, which are likely to be commercial vehicles, heavy machinery, or equipment.
You can use asset finance to get new assets which are vital to your operation, or to release cash from the existing assets you have (which is normally called asset refinancing).
Like many funding options in today’s market, asset finance comes in all shapes and sizes, and deciding which one to go for will really depend upon your requirements, circumstances and how well you meet the criteria of the various products and lenders.
With that in mind, here’s a brief overview of some of the main products available for purchasing an asset.
Hire purchase is essentially purchasing an asset but spreading the cost over a set period of time – paying in monthly instalments rather than having to find a lump sum upfront.
Obviously, the flexibility of being able to pay in instalments comes at a cost, and you will end up paying back more than the ticket price of the asset.
Once that repayment period comes to an end, the asset is yours to keep. Any maintenance and insurance required during the repayment period and thereafter will be your responsibility.
Hire purchase is a straightforward option for items that you are planning to keep for the long term, where you maybe can’t raise the required capital upfront, or you’d rather not commit a lump sum in one go.
Tax wise, items financed using hire purchase will appear on your balance sheet as an asset from day one, which is worth discussing with an accountant before making a decision.
Equipment leasing is a completely different scenario in which you essentially rent the vehicle or equipment rather than buy it – although you sometimes have the option to purchase it at the end of the agreement if you want to.
You will pay a monthly amount to lease the asset without any of the responsibilities of ownership. Things like servicing and maintenance are generally covered by the terms of the lease, and leasing also makes it easier to upgrade to newer models.
At the end of the lease term, you can either extend it, begin a new agreement with an upgrade, or give the asset back and end the contract.
There is also sometimes the option to buy the asset, at a price which takes into consideration the amount you have already paid. You can usually get finance to cover this final payment too.
This form of asset finance generally works best if you only need an item for a relatively short period of time.
Tax wise, leased equipment is classed as an operating cost, and is therefore written off against gross profit. Again, it’s a good idea to discuss the tax implications with your accountant before signing anything.
Equipment leasing typically refers to finance leases or operating leases:
With a finance lease you are basically leasing a depreciating asset for most of its useful life. It’s very similar to hire purchase in that you take responsibility for ownership in terms of maintenance and servicing, but you won’t ever actually own the equipment.
The main point is that it will feel like hire purchase in practice, but will appear as an operating cost on your balance sheet instead of an asset depreciation, which can provide a tax benefit for certain firms.
With an operating lease you can lease the asset for a fraction of its useful life; essentially renting it for a short period of time. You don’t take on the responsibilities and risks of ownership and it also appears on your accounts as an operating cost.
The shorter term can offer greater flexibility, especially if you only need the asset for a brief period, or you require regular upgrades and don’t want the hassle of constantly selling and buying equipment.
Rather than raising finance to buy an asset, with an asset refinance you can use your existing assets to raise cash in the form of a loan, basically releasing the equity tied up in the asset and using the asset itself as security against that loan.
Typically, you’ll be able to secure up to 75% of the value of the asset, depending on its depreciation, on the understanding that the lender will take the asset if you fail to make the repayments on your loan.
Using an asset as security for a loan can improve your chances of getting funding, but you still have to demonstrate a sound business model.
As with all business finance, you need to weigh up which product is best suited to your business. With asset finance, that largely depends on how long you need the equipment for, and the future plans for your business.
At the same time, different lenders have different requirements, so it’s important to find the right match at a price you can afford.
About the author
This guide has been written exclusively for ByteStart by Conrad Ford, Chief Executive of Funding Options. Funding Options can help you find the best funding for your situation without the hassle of speaking to multiple lenders, and has recently been described by the Telegraph as “the matchmaking website for small businesses and lenders”.
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