After the 2007–8 financial crisis, the unsettling of financial services contributed to a wider variety of funding types becoming available to businesses. One such form of funding that came to the fore after that global economic meltdown was asset finance. We review how asset finance could support your business.
What is an asset?
An asset is a resource or object that has value and is owned by an organisation, helping them generate income, achieve growth or deliver their purpose.
There are two overarching types of asset:
- Hard assets are physical, such as plant, machinery, vehicle, equipment and premise.
- Soft assets are less durable and may have little saleable value come the end of the finance agreement. These include IT equipment, software packages, furniture and electronics such as tills and security systems.
What is asset finance?
Asset finance helps you pay for your business’s physical assets. It is most often leveraged when an organisation is looking to grow but does not have the requisite funds, so secures a loan against one or more of their assets in order to purchase more of them. The client pays a regular sum to the lender and, depending on the type of asset financing involved, the item may eventually become the property of the organisation.
What sorts of asset finance are there?
There are a number of forms of asset finance, each with its own unique benefits and pitfalls.
Also called vehicle asset finance, contract hire is a form of asset finance that pertains only to vehicles. A company that needs to expand its fleet will approach a lender, who will then source the vehicles required. You pay the provider in instalments over an agreed lease period. Servicing costs, maintenance and what happens to the vehicle after the term are the responsibility of the lender, not you.
This form of asset finance involves the provider purchasing the asset your business requires and renting it out to you. You’re required to pay only a fraction of the total value upfront, which is fantastic if you need a high-quality and expensive plant or piece of machinery but don’t have the funds to buy it outright.
Generally speaking, you will need to pay the first month’s rent upfront. The remainder is then spread out over the lease period. At the end of the term, you may either continue to lease the equipment, purchase it, upgrade to a new piece for a new lease or simply return it. For these reasons, equipment leasing proves especially popular for those companies that are having to adapt to rapid change and who can’t presently form medium-term financial projections.
Also known as a capital lease, a finance lease is a long-term lease designed for an asset’s lifetime. You attain full use of the asset and pay it off over time but don’t technically own it.
The payments last generally until the finance provider has recouped the asset’s purchase value. The lender may allow you to share in a percentage of the share value once the item has been sold, but your business won’t have the option of purchasing the asset outright.
With hire purchase, you pay for the asset in instalments. The item appears on your balance sheet and, because you own the asset, you are responsible for its insurance and maintenance. You will also retain full ownership once the term ends.
Similar to contract hire, an operating lease can be summarised as a rental agreement with a set term. Rental costs are based on the period for which the asset is required which is normally only part of the useful life of the asset. Maintenance is generally handled by the lease company.
Operating leasing is very similar to equipment leasing, but is most commonly leveraged for specialist machinery that the company may not have use for over the asset’s entire lifetime. Nevertheless, it is still often cheaper than equipment leasing because the business pays only the calculated value of the item over the limited lease period agreed.
Asset refinance involves securing a loan against a business-owned asset such as a vehicle, piece of equipment or even premise. If you can’t maintain payments on the loan, the provider will reclaim the asset to recoup what’s owed. How much you can borrow depends on the value of the assets involved, because you are effectively ‘unlocking’ cash.
Asset refinance is a flexible arrangement and there are many products available, but remember that the asset must be critical to your operations, as well as physically removable in order that it can be considered security for your loan.
Unlike with a business loan, asset refinance allows you to leverage as collateral even physical assets that you only partly own—although this does not extend beyond the level of equity you have in that item. Once the refinancing has been agreed, you pay the provider in instalments over an agreed period, with interest on the loan. If you want to find out more, check out our ultimate guide to business loans.
Over how long a period may I take out asset finance?
The length of an asset finance agreement—particularly when it entails the purchase of specialist equipment—is governed by the asset’s operational lifetime. This tends to be between one and seven years, but may be shortened or extended at the provider’s discretion.
What are the minimum and maximum amounts I may raise with asset finance?
The limits of an asset finance agreement depend on the provider, but it’s possible to secure a lease for a sum as small as £1,000. At the other end of the spectrum, the most expensive agreement you are likely to find will be around £10 million. The lender will need to be satisfied that your business can afford the repayments prior to the purchase or loan being approved.
What kinds of assets may I finance?
Asset finance providers consider a diverse range of high-value items, both for borrowing against and for purchase and leasing. However, they must be durable, identifiable, moveable and saleable.
The pros and cons of asset finance
Asset finance won’t always be the best solution for your business, so consider each offer carefully in accordance with your company’s financial situation before signing on the dotted line.
- Spreads the cost of items rather than requiring a large lump sum payment.
- Minimal upfront costs for high-value items.
- The asset itself may be leveraged as collateral in securing the loan.
- Fixed payments streamline long-term budgeting.
- Depending on the agreement, expensive servicing and maintenance may be shouldered by the lender when hiring or leasing.
- The risk of depreciation and the responsibility for replacing the item if it becomes dysfunctional before the end of the term may fall to the provider.
- Allows you to retain crucial capital for other business purchases.
- Useful alternative to other typically higher-interest forms of lending, such as overdrafts and bank loans.
- Damage that isn’t covered by maintenance or servicing may not be covered under your finance agreement, which would mean paying for it yourself or obtaining insurance.
- Missing a payment or defaulting on the loan will lose you the equipment, which may have severe ramifications if it is crucial to business operations.
- Leasing finance or a hire contract may mean you pay for an item you’ll never own.
- Not a short-term solution to financial issues, because most asset finance providers will not consider terms of less than one year.
Is asset finance right for me?
In the past, asset finance tended to be an avenue taken only by larger businesses, but decreases in the minimum levels of finance available have led to it becoming a more widespread option. Just make sure to compare asset finance deals to secure the best agreement for your company, and calculate whether you’ll be able to make the repayments on time.