October 30, 2020

What is Asset Finance? A Guide to Asset Financing for SMEs

Purchasing new equipment or machinery outright can pose a significant challenge for SMEs and can potentially cause cash flow issues. Often, businesses don’t have the working capital available to pay upfront for an asset. That’s where asset finance can come in handy.

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What is an asset?

An ‘asset’ is a term for an item that has monetary value which can be converted to cash. Assets used by businesses to enable them to achieve their goals and generate income. Business assets include things like vehicles, property, tech and office equipment. 

 

Asset finance — definition

Asset finance is a type of business finance that enables company owners to gain access to assets. There are lots of different types of asset finance and each serves a slightly different purpose; for example, asset refinance allows you to retrieve cash from the value of the assets you own. 

 

Asset finance company — definition

An asset finance company is simply a lender who provides asset finance to businesses. Every lender is different: some may offer a range of asset finance options whereas others might focus on one or two. Some lenders also specialise in specific industries such as agriculture or construction.

 

Why would a business apply for asset finance?

Certain assets are necessary for a business to remain operational, let alone grow. 

For instance, if you run a coffee shop, you’ll need assets in the form of a coffee machine, refrigeration equipment and furniture to be able to function — and that’s just a start. But what happens if the coffee machine you rely on for income breaks?

You might not have access to enough capital to purchase a new one. On the other hand, you may have the money but want to save it for something else, like an emergency. 

Asset finance can be used to facilitate growth. For instance, you might be experiencing an increase in demand and require another machine to help you keep your customers happy while driving up revenue. You can use asset finance to spread the costs over a longer term.

Essentially, the asset finance loan provider pays for the asset and the borrower pays a regular sum to the provider. The borrower may decide to pay it off and own it outright, upgrade to a newer model or exit the agreement when it comes to an end.

With asset refinance, businesses can use their asset(s) as security against a loan. 

 

Different types of asset finance explained

There’s a whole range of asset finance products out there to suit a range of requirements; let’s explore each type in a little more detail.

 

Hire purchase

It’s simple. With hire purchase, you can buy an asset and spread the cost over a set period of time in monthly instalments. As you technically own the asset, you are responsible for its upkeep and insurance. The plus side is you’ll own it outright once the finance term comes to an end. The asset will appear on your balance sheet. 

 

Equipment leasing

This operates on a rental-like model. The asset finance lender purchases the item and you, as the business borrower, pay rent on it every month for a set period of time. 

At the end of the term you can extend the lease, give it back to the lender, get an upgraded version of the asset or pay the remainder and own the equipment outright. 

As you don’t technically own the equipment for the lease term, maintenance costs are usually included. Equipment leasing can be ideal if you want to rent equipment on a short—term basis or if you need access to the latest equipment in order to compete. 

An equipment lease is counted as an operating cost.

 

Finance leases/capital leases

A finance lease, otherwise known as a capital lease, is like a cross between hire purchase and equipment leasing. It’s designed to cover the period of the asset’s life. Because you don’t own it, it doesn’t get listed on your balance sheet, however you do pay for its full value over time. You can offset rental costs against profit and claim VAT — which, depending on your circumstances, could be tax-efficient.

 

Operating leases/contract hire

With an operating lease, the business rents the asset for a set period of time and maintenance is usually managed by the lease company. 

This type of lease won’t appear on your balance sheet either but it can often be less expensive as you aren’t paying for the asset’s full value. Contract hire usually relates to vehicles. 

For instance, a company who wants to increase its fleet can get a provider to obtain the vehicles; the business then pays a set amount for the duration of the lease term. Maintenance and servicing are handled by the provider. 

Fleet management services can also be part of the agreement for businesses with multiple contract hire vehicles. Contract hire can save businesses time and money, especially when it comes to maintenance and servicing. 

 

Asset refinance 

There are two main types of asset refinancing. 

The first is when a business uses its assets as security for a loan. The second involves a business selling an asset to a finance provider for a sum of money, after which the business leases it back until the amount is paid (with interest) in full. Businesses can also refinance assets they partially own — up to the level of equity they have in it. 

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