Confusing? Asset finance is pretty simple, but sometimes the terminology can be complicated.
The industry uses jargon which can leave people a bit muddled, especially as some of the types of asset finance have names which sound very similar to one another. And at times, you might find different terms are used interchangeably or abbreviated, e.g. HP for hire purchase.
We know that there are many questions being asked about asset finance, from a simple ‘what is asset finance?’ through to wanting to understand the technical differences between asset finance agreement types, the types of asset financing solutions, what is it suitable for, and how this form of business finance can be used.
Our most popular post covers the difference between a finance lease and an operating lease. It gets many thousands of visits each year and shows the need for a bit more clarity. If you are interested and would like to take a look, further down there’s a short video to give you an overview, and a link to the blog post.
So let’s take a look at some of the most frequently asked questions.
Starting with the basics …
What is asset finance?
Asset finance is a broad category that refers to funding assets or equipment, over an agreed period of time, in return for regular payments. A key benefit is spreading the cost of investment, reducing demands on valuable capital and reducing the cash flow impact of purchasing outright.
Asset finance can be used in a surprisingly wide range of applications. Most typically we find businesses wanting to fund things such as vehicles, construction equipment or IT kit. But there are many examples of less mainstream uses such as medical equipment, furniture, and mobile classrooms.
The category of asset finance covers various funding structures, the most popular being hire purchase, finance lease and operating lease. More on this later.
What are the benefits of asset finance?
Asset finance is useful for businesses which need to invest in new or replacement equipment and want to avoid the need to release large amounts of capital upfront. This gives you increased flexibility with cash flow and the use of available funds.
Budgeting is simplified as payments are usually fixed and made at regular, agreed intervals.
In most instances, the agreement is secured on the equipment itself, rather than on the business or by the individual. This can make it easier to secure funding because the funding provider has some security in the asset. Asset financing is often quicker to source and agree than many other forms of business funding such as business loans.
Tax, accounting and balance sheet benefits can apply; payments on certain types of agreement are tax-deductible business expenses which can be offset against gross profit, and tax relief may be available on the capital investment.
There can be operational and administrative gains too. A good example of this is contract hire vehicles. Contract hire is a form of operating lease and can also include maintenance and fleet management services, reducing internal admin, operating cost and improving the productivity of your fleet.
How does asset finance work?
On a very basic level, you select the asset you require, the finance company pays for it and provides it to you according to a pre-agreed contract. This means that you will have access to the equipment you require quickly, without having to pay a large lump sum upfront that could affect your cash flow.
Payments are spread according to the agreement, usually monthly but it can vary. For example, it is usually better for schools to make annual payments, and seasonal schedules can be arranged for those that have significant seasonal variability in their business, such as construction firms.
If you are interested in finding out more about our funding options, visit asset finance solutions
What types of asset can be financed?
With the right provider, you can have access to virtually any equipment you require for the development of your business. Industries that use this to their advantage include, but are not limited to; agriculture, construction, education, transportation, green energy, manufacturing, waste disposal, retail, medical, and a wide range of organisations that require vehicle fleets.
The industry tends to refer to assets as ‘hard’ or ‘soft’. Traditionally, the market was focused on hard assets, i.e. durable physical equipment, which tend to be machinery or ‘things with wheels’.
Some examples of hard assets are:
Materials handling equipment
Today, asset financing is also available on what are known as ‘soft assets’ which are items with a low intrinsic open market resale value. Unlike the ‘hard assets’ mentioned above where the funder has some security in the physical asset, these are generally viewed as unsecured and so the credit profile of the organisation will take greater importance.
Examples of soft assets are:
IT & communications equipment
What types of asset finance agreement are available?
When it comes to deciding on the right type of finance agreement for your business assets, you should consider the pros and cons of all funding options.
We cover this extensively in our ‘Ultimate Guide to Asset Finance’ and recommend taking a look at this if you would like more detail.
How can asset finance help my business grow?
By choosing a finance agreement, you are given the benefit of being able to invest in assets to support business growth and expansion which businesses might not otherwise be able to afford. Asset finance offers an attractive alternative to tying up valuable capital which could be better used in other ways. And it helps spread the cost and improve cash flow.
Having access to new technology or machinery may allow the business to expand, develop new services or become more efficient.
How do you finance an asset?
This can be done in several ways and the best solution will depend on the organisation’s circumstances and the nature of the asset in question. Here’s an overview of the options:
Most people are familiar with hire purchase agreements (HP) as a method of obtaining an item immediately and paying for it in instalments which spread the cost over an agreed period. At the end of that time, the asset may automatically belong to your business or, depending on the conditions of your hire purchase agreement, you can decide whether to pay a nominal sum to own the item outright.
Bank loan or overdraft
You could go to your bank and ask for help. Whilst simple, there can be drawbacks to this most traditional of approaches:
If you apply for a bank loan, you’ll rarely be dealing directly with the decision-makers. You could be assigned a personal/business banker liaison in your branch, but you may still find third-party communications slow, awkward and frustrating. It can take a great deal of time to get an answer from a team of remote decision-makers, especially if they’re having to get back to you several times for more information – don’t forget, they aren’t just dealing with your application, and it could take many weeks or even months to get a decision. If your need is time-sensitive, this could be a challenge.
Bank loans may be assessed against a set of rigid tick-boxes, with little room for adaptation to your unique circumstances.
If you ask for an overdraft as capital to buy your asset or assets, you’ll not only be facing ongoing fees which can be substantial over time but as the bank can withdraw the overdraft facility at any time, you have little security. Overdrafts typically attract higher interest rates too.
Leasing in one form or another is a very popular form of business finance and can be a very affordable way of securing new or used assets.
Operating leases usually apply to an item that has a residual value at the end of the lease, like a vehicle or substantial machinery. These let you have full use of the asset over an agreed period of time, which remains the property of the equipment leasing company (the lessor). Often, things like maintenance or servicing can be included in the leasing agreement, so you have no worries about extra costs. You’ll pay a regular rental amount over the life of the contract and, at the end of it, the lessor will remove and sell the asset.
Contract hire is the term applied particularly to vehicle leasing, but the format is similar to an operating lease.
Finance leases also give you use of the asset for a regular rental payment and the lessor retains ownership, but you take the risks and rewards of ownership as you are usually required to sell the asset on at the end of contract and settle the balloon payment. You will be responsible for maintenance and repairs. At the end of the primary lease period, the lessor may give you the option to continue renting it, maybe at a reduced rate.
Asset-based loans are a way of raising capital or a revolving credit facility on an asset you already own. Essentially, a provider will give you a loan or a line of credit in exchange for title to your equipment and you repay as per your agreement with them. If you default on payments, the finance company can take and sell the asset to recoup their money.
Here’s a brief video about the difference between finance and operating leases. If you’d like to know more about this read our top blog post.
What is asset finance suitable for?
Asset finance can be applied to a huge range of new and used business assets, examples include:
• Business machinery
• Catering tools
• IT and specialist software systems
• Agricultural machinery and vehicles
Though that’s a short list, companies will welcome enquiries about business financing for a wide range of items.
How long does asset finance take to arrange?
Unlike a bank, an asset finance provider can take as little as a few hours to get a funding decision made.
Do businesses need a profitable trading history to qualify?
Not necessarily, as yours may be a new establishment with little or no trading history. However, you will have to show that you are in a position to be able to make repayments as agreed and on time. You’d be wise to evidence some sort of business plan for the lessor to take into account that includes the new asset, showing how it will positively impact your turnover. One definite advantage of using asset finance is that finance is usually secured on the item itself, which can protect the rest of the business assets if things don’t go quite to plan.
Why not just use cash?
Well, of course, if you have the capital to buy outright you could do so. The benefits are that it’s yours instantly and you don’t have any financial contracts or ongoing payments to consider. It might seem a good way to go if you have a large capital fund and the asset isn’t too costly. However, if your business doesn’t have a large cash surplus and the new investment is going to take most or all of your reserve, then it would be prudent to retain some cash and use a cash flow friendly alternative.
Leaving yourself with little or no liquid capital means you have nothing to fall back on if there’s a problem or you need cash in a hurry for something. Equipment leasing or buying by instalments via hire purchase means that you retain your capital buffer and have set manageable and predictable lease payments which are easy to budget for. There can also be tax and accounting advantages.
Is asset finance regulated?
Financial services firms in the UK are regulated by the Financial Conduct Authority, which exists to ensure that the market works fairly for individuals, businesses and the economy.
The Financial Conduct Authority, or FCA, covers financial services providers for ‘regulated activities’. This is a long list, but in this context covers consumer credit activities. From an asset finance provider’s perspective, consumer lending, such as hire purchase for a car is regulated activity.
General business asset finance does not come under this definition and as such is not classed as regulated by the FCA.
However, many asset finance providers are authorised and regulated by the FCA for regulated business and, as such, will have likely adopted the same processes and practices across the organisation.
What is refinancing?
Asset refinancing uses the equity that the business holds in its existing assets to raise working capital for alternative purposes. It’s not only for those that own assets outright; if an asset has an existing contract in place, it is still possible to refinance it as long as there is equity in it. For example, if an organisation owns a piece of machinery with a current value of £100k, and has existing debt of £20k against it, it will still be possible to arrange for asset refinancing for the equipment based on the £80k equity which it holds.
What is vehicle asset finance?
Vehicle asset finance would be a broad term used to describe the various ways of providing finance for vehicles through operating or finance leases, or HP. The most popular of all the vehicle funding options is contract hire which allows businesses to spread the cost and reduce risk via this form of vehicle rental. There is a lot more detail on this in our fleet section.
Answers to Your FAQs
Asset financing is a great way to move your business forward in terms of being able to get hold of machinery, vehicles and many other business tools without laying out huge amounts of precious capital through outright purchase.
Sadly though, many either don’t know the types of asset finance that is available or don’t realise that it could be a good solution for their business.
Perhaps you’re thinking about expanding and are trying to work out the best way to fund the changes? Maybe you’ve been offered a big contract and will need plant or vehicles to service it? Equipment leasing could be the answer.
If you’d like to read more on using asset finance and related funding options, you can visit our main page: Asset Finance Solutions
We hope this guide has helped to answer your questions. If you have anything we haven’t covered, please add it in the comments below and we’ll get an answer for you.
Or, if you’d like more information on how we can help your business to grow and prosper, just fill in your details on the form below and one of our team will be in touch.