What is asset finance?Sam Sandhu
You have heard of the term, but what exactly is asset finance and how do you know when it’s the right product for your business?
Referring to the use of a company’s balance sheet assets– and this can include short-term investments, inventory and accounts receivable – in order to borrow funds or get a loan, companies relying on asset finance must provide the lender with security interest in the form of an asset.
Is asset finance right for your business?
Put simply, a secured loan is backed by assets. Opting for a secured loan or unsecured loan could make all the difference when it comes to the amount of interest a company ends up paying. And, with a secured loan, the person borrowing has pledged ‘security’, which could come in the form of vehicles or equipment. There is the risk that these could be seized by the lender in order to pay off the loan.
Start-ups or SMEs with few assets might end up using their own properties to secure a loan for their business. However, the four most common types of asset finance regularly used are:
- Hire purchase
This is where the finance provider purchases any equipment that the client needs, and then effectively hires it out to them while they pay off the balance. Usually the payment terms are fixed and the contract will state that ownership will be transferred to the client as soon as the repayment period is completed.
- Operating lease
Similar to hire purchase but not involving client ownership, an operating lease sees the finance provider purchase the equipment and lease it to the client for an agreed period. Once again, this agreement is based on fixed payment terms. Once the lease period is over, the equipment is then returned to the financier.
- Finance lease
This is an asset finance option that sits somewhere in between hire purchase and an operating lease. There is an agreed leasing period but, unlike an operating lease, the contract gives the client more flexibility when the lease runs out – for example, the client can either return the equipment, negotiate an extension on the terms of the lease, or decide to pay off the balance of the value of the equipment and therefore purchase it outright themselves.
- Contract hire
This form of asset finance relates to the act of purchasing a vehicle for commercial use. In much the same way as hire purchase, the costs are spread over a fixed repayment period where the client is hiring the asset while waiting to pay off the balance. The main difference is that the repayment schedule might also include a monthly mileage quota, which will change how much gets repaid depending on use.
The benefits of asset finance
One of the biggest benefits of asset finance is the fact that business owners do not have to put up any of their other business or personal assets as security. Because the finance provider is hiring or leasing an asset instead of actual money, and therefore legally owns the asset, it is the asset that serves as security until the business has repaid the full value.
And because no money has been loaned, the finance provider can’t decide to call in the loan at any point because no money has been loaned. This gives the business owner greater security throughout the lifetime of the agreement.
You should remember that asset finance arrangements are very flexible. And this can be great when it comes to negotiating repayment terms with one eye on your business’s available cash flow. Not only that, you can opt whether to return the equipment or buy it at the end of the repayment term.
There’s also the chance that the extra revenue you gain from running the equipment – the asset – will cover the repayments, which means that it has paid for itself with no impact on your finances. In addition, the leasing option protects small business owners from depreciating values associated with expensive and high specification equipment.
How Funding Bay can help
SMEs need to be aware of all the options available to them. For example, external funding such as asset finance that can give them a cash buffer.
Funding Bay is a finance introducer that can find the right solution for your business.With unparalleled industry experience, the team can put business owners in touch with the lenders who will best suit their business’s requirements. This means personal, jargon-free guidance.
Ultimately, they help SMEs raise capital and find the relevant finance product for your needs – enabling business owners to concentrate on the day-to-day running of their company rather than losing time worrying about cashflow.