What Is Asset Finance

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If you are running a business, there will inevitably come a time when you need to acquire assets such as machinery, vehicles or equipment to operate efficiently. However, purchasing these assets can be expensive, significantly impacting your cash flow. Therefore, asset finance is a popular solution businesses use to acquire assets without needing upfront payment.

We have broken down the 10 Things You Can Finance With Asset Finance.

  1. What Is It?
  2. Advantages
  3. Disadvantages
  4. Different Types
  5. Can a Small Business Get Asset Finance?
  6. How Can A Broker Help?

What Is Asset Finance?

It is a type of business finance that allows your business to acquire assets without paying for them upfront. Your company can use asset finance to purchase any asset, including vehicles, machinery, IT equipment, and office furniture.

It allows a business to borrow money to purchase the asset, which they then pay back in instalments over an agreed period. The asset itself is used as collateral for the loan, which means that if your business cannot repay the loan, the lender may repossess the asset to cover the outstanding debt.

There are several different types of asset finance which we have explained below.

Advantages of Asset Finance

  1. Preserve Cash Flow: Using asset finance to acquire assets can preserve your cash flow, which is vital for the smooth operation of your business. Instead of using your cash reserves to purchase the asset outright, you can use asset finance to spread the asset’s cost over a more extended period.
  2. Flexibility: You can tailor asset finance to suit the individual needs of your business. You can choose the length of the repayment term and the type of finance that best suits your business.
  3. Tax Benefits: Businesses can claim tax benefits, depending on the type of asset finance used, such as capital allowances. Reducing the overall cost of acquiring the asset.
  4. Budgeting: Most agreements come with fixed interest rates, so you’ll know how much you’ll be spending over the term, making it easier to plan budgets.
  5. Supports Growth: Access to the latest equipment as it provides you with a way to purchase new machinery, something you may not have been able to afford if you had to pay upfront.
  6. Less Risk: It’s less risky than a business loan as you won’t get penalty charges if you can’t pay and will only lose the equipment.

 Disadvantages of Asset Finance

  1. Interest Rates: Asset finance can be more expensive than other types of finance, such as bank loans, due to the lender taking on more risk by using the asset as collateral.
  2. Ownership: With some types of asset finance, the lender may retain ownership of the asset until the company repays the loan in full. Not having ownership can limit the business’s ability to use the asset as collateral for other loans.

Different Types of Asset Finance

Hire Purchase (HP)

HP is the most popular type of asset finance. Your business pays an initial deposit and regular instalments over an agreed period. Ownership of the asset is transferred to the company once they have made the final payment. For this reason, you can’t sell the asset during the finance term. 

A Purchase Option Fee is often required to transfer ownership of the asset to you, which can be as low as £1. 

With HP, you are responsible for the asset’s maintenance and insurance.

Finance Lease 

With a finance lease, the financial lender buys the asset your business needs and then rents it to your business for a monthly rental fee. You will agree to an upfront lease period. However, at the end of the lease period, there are a few different options. 

  1. Extend the rental period and keep using the equipment.
  2. Return the equipment to the lender, as they are the owners.
  3. Sell the asset on behalf of the lender. In certain circumstances, you may share in the proceeds from the sale.

With a finance lease, you are responsible for insurance and maintenance costs during the rental period.

Operating Lease

Like a finance lease, your business leases the asset for an agreed period, paying a monthly rental fee. However, at the end of the lease period, your company returns the asset to the lender.

It is a short-term option, meaning the overall costs are lower than a finance lease, but the monthly payments are higher than other finance options. It often works out cheaper because the price is based on the value of the equipment but over a much shorter period.

The most significant advantage of an operating lease is that your business can upgrade the equipment regularly, sometimes even during the rental period. Another benefit is that the company that rents you the equipment is responsible for its maintenance.

Equipment Leasing

Equipment leasing is another option which is similar to finance leasing. However, the main difference is that your company can own the asset at the end of the rental period. 

At the end of the rental period, there are a couple of options for your business: 

  1. Extend the rental period and keep using the equipment.
  2. Return the equipment to the lender, as they are the owners.
  3. Upgrade the asset.
  4. Pay the balloon payment and own the asset outright. 

During the rental period, the leasing firm is responsible for the maintenance of the equipment. 

Equipment lease agreements are based on the asset’s depreciation, not the total cost price, which means the monthly lease payments are typically less than hire purchase. However, if you opt to purchase the equipment by paying the balloon payment, it may be more expensive than if you had bought it outright.

Asset Refinance

Asset refinancing helps you to release capital tied up in the assets you already own, so it is an excellent option for helping with cash flow. Using your assets as collateral allows you to access a line of credit to raise funds.

Asset refinancing involves your business selling an asset to a finance company, which then leases that same asset back to your business. Your company receives the lump sum from the asset’s sale but still benefits from using the asset for a monthly fee. At the end of the repayment period, the finance company now owns the asset. You may continue renting the asset, walk away from it, or repurchase it for an agreed sum.

Can a Small Business Get Asset Finance?

Yes, it is ideal for small businesses or start-ups. It allows your business to purchase essential equipment without significant capital investments. Because the equipment acts as security for the financing, asset finance options are available to companies regardless of their length of time in business.

How Can A Broker Help?

Organising asset finance can be overwhelming, especially with the number of choices available. However, it is a broker’s job to understand which financial products will best suit your needs and which lenders will most likely lend to you based on your circumstances. 

A broker is an expert in their field and will have relationships and contacts with numerous banks and lenders. These relationships enable brokers to negotiate the best rates and deals for you, meaning you’ll often save money.

Contact us if you want to take advantage of the benefits of using an asset finance broker.
info@dorsiafinance.co.uk | 01522 420 420

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