Asset Finance

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What is Asset Finance?

Asset finance allows a business to purchase or lease new assets such as equipment, machinery or vehicles without a large upfront cost.

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Why Choose Asset Finance?

Asset finance is an ideal option for businesses looking to acquire assets without making a significant upfront investment.

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How it Works

Asset finance uses a business’ balance sheet assets to raise finance. For funding, the business must provide the lender with a security interest in the assets.

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Asset Finance at a Glance

What is Asset Finance?

Asset finance allows a business to purchase or lease assets such as equipment, vehicles, and machinery, without paying all the costs upfront. This can be helpful for businesses looking to accelerate growth without the need to draw on their cashflow.

As well as purchasing new assets, asset finance can also release cash that is tied up in existing assets, including refinancing assets already on finance.

There are two main types of asset finance that are commonly used: hire purchase; and lease financing. An asset finance lender will usually work out the affecting depreciation of the asset in question and usually offer around 90% of the assets value for finance or refinancing.

What can Asset Finance be used for?

Asset finance relates to practically any valuable items within a business that can be financed. There are two main categories of assets that can be financed, classified as ‘hard’, or ‘soft’ assets.

Hard assets are physical items of value such as:

  • Agricultural machinery
  • Heavy good vehicles or fleets
  • Manufacturing equipment
  • Plant equipment
  • Construction vehicles

Soft assets are considered those with little or no second-hand value at the end of their lease period such as:

  • Computer hardware and software
  • Office furniture
  • Medical devices
  • Security systems
  • EPOS systems

Why choose Asset Finance?

Asset finance can be an advantageous option for businesses due to the funding being based on your business balance sheet (which shows your inventory, physical assets, as well existing debtors). For this reason, asset finance is sometimes used to raise capital where more traditional unsecured lending options are not available.

Asset finance is also an ideal option where businesses are looking to invest in new assets, whilst maintaining or improving their cashflow.  This is because it allows you to pay for an asset over time, as opposed to having to front the full cost upfront. Asset finance therefore allows businesses to continue with their growth and expansion plans organically, rather than having to wait for capital to become available within the business.

Key benefits:

  • Use new or existing assets as security for a business loan.
  • Refinance existing assets you already own to free up liquid capital in your business for other uses.
  • Ideal for financing the purchase of expensive or large machinery, including fleets and vehicles.
  • Reduce your tax liabilities by offsetting your monthly repayments.

How does Asset Finance work?

There are 2 main types of asset finance available, hire purchase and lease finance, along with an asset refinance option.

Hire purchase (HP) gives businesses the option to purchase the asset for a small fee at the end of the initial finance agreement. In this instance you will generally pay a higher upfront proportion of the cost, or an initial deposit. The rest is then paid monthly until the end of the agreement. At this point you have the option to purchase the asset outright for a remaining fee often, referred to as a ‘balloon’ payment.

In lease finance, the lender purchases the asset you identify, and they will then lease it back to you throughout the agreed term with you making monthly repayments. With this option you would typically pay a lower upfront cost than what you would for a HP agreement. Once the initial lease period has ended, you can retain the asset, subject to paying an agreed annual rental to the lender.

Asset refinance allows you to release cash from an existing asset that you already own. This could be for example to help boost cashflow. It can be provided on either a HP or lease arrangement. Refinancing an existing agreement with money still owed is also an option. Usually, the borrowing is based on a percentage of the asset’s equity. If the asset is owned outright you will likely be able to get a higher percentage of the overall value.

Sitting somewhere between both HP and lease finance is another option known as finance lease or capital lease. This is a longer-term lease option designed to last for the duration of the asset’s lifespan. It gives you full use of the asset and you pay for the full value over time. Officially you do not own the asset, and it therefore does not appear on the business balance sheet. This in turn has the benefit of it being possible to offset the rental cost against your profit and claim back VAT which could be a tax efficient option.

Asset based lending is a specialist finance option, often requiring lenders with industry-specific expertise. Our team can help to connect you with the right lender and find you the best rate and terms. For more information please get in touch.

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