An introduction to asset finance
What is asset finance?
Asset finance sounds complex but in fact the term simply describes a variety of hire purchase and leasing options available to a business. Asset finance can be a useful way to secure funding for the purchase of equipment, machinery or vehicles.
why should i use asset finance?
Asset finance offers an alternative to a traditional bank loan or overdraft and can be used by every type and size of business which is able to meet the provider’s lending criteria. Available to sole traders, limited companies and PLCs, asset finance can be used for anything with a tangible value.
Why is asset finance good for my business?
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What are the different types of asset finance?
Hire purchase
Also known as lease purchase, hire purchase (HP) for business is similar to HP for individuals. The lender owns the asset for the length of the agreement and, after an initial deposit, the business repays the balance of the asset cost plus interest with regular, fixed payments. Once the agreement term is completed, the business will automatically own the item outright after a final payment.
Hire purchase or lease purchase has several advantages:
- It’s kind to your business cashflow
- Payment can typically be spread over two to seven years with a deposit as low as 5% of the net asset cost plus VAT
- It is possible to claim capital allowance and gain tax relief on the interest charged on payments
- Has fixed, regular payments, usually with the possibility of a monthly, quarterly, annual or seasonal payment schedule
- You own the asset at the end of term
- Asset finance is a ‘committed’ facility and while the borrower maintains the agreed payments the facility cannot be withdrawn or broken. This enables a business to work with a fixed budget and forecast confidently knowing the funds cannot be recalled
- As the funding is secured against a particular asset, businesses are free to utilise other business assets as security for other borrowing
Leasing
Similarly to hire purchase you make regular payments but with a lease you only rent the asset and at the end of the term the asset must be sold to a third-party with the business receiving an agreed percentage of the sale price as a rebate agains the rental payments.
The benefits of a lease include:
- Fixed, regular payments
- The business can claim back the VAT on their monthly rental rather than the initial purchase price
- A business may be able to offset rental payments against profits and reduce their tax liability
However you will never fully own the asset which must be sold to a third party at the end of the term.
operating leasing
An operating lease enables a business to rent and use equipment for a short or medium period, paying a fixed fee for the duration of this usage. Cheaper than equipment leasing, the business only pays for the useful economic life of the item.
For example, a business needs a £100,000 machine to fulfil a three-year contract. A leasing company may attribute a residual value of £30,000 to the asset and therefore the business will only pay rent on the remaining £70,000 plus interest over three years. At the end of the term, the business can renegotiate a further lease term if it requires the machine ongoing.
Asset refinancing
Asset financing enables a business to use an existing company asset as security for a loan provided there is sufficient equity, this can also be used where the asset is already on finance with another lender. However, the company then leases back the asset and repays the borrowed lump sum over an agreed period.
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How long can I use asset finance for?
Typically lending terms are between 24-72 months but it’s always important to consider the value of the asset to the business when considering an agreement. With such a wide variety of asset finance products to choose from, it’s essential to work with a commercial finance broker such as Complete Commercial Finance to understand and ensure your business chooses the right asset finance for your circumstances.
What can asset finance be used for?
Asset finance can be used for practically anything. Here are some of the typical scenarios where asset finance is used by a business:
Hard assets
Physical, high-value e.g. machinery, plant, equipment for construction, manufacturing, engineering businesses; vehicles including cars, vans, lorries, coaches.
Soft assets
Software, IT, furniture, electronics, CCTV, security systems, cash registers.
how much does asset finance cost?
The cost of asset finance depends entirely upon the individual circumstances of the business and its requirements. To find out how much asset finance costs, speak to Complete Commercial Finance on 01553 611619.
complete commercial finance, king's lynn asset finance broker
A local, well-established haulier typically worked with high street banks for all its business funding requirements. The company saw an opportunity to buy a fleet of trailers from another haulier at a reduced price, however it was declined finance by its existing high street lender as the assets were not being bought from a registered supplier. The haulier firm contacted Complete Commercial Finance which was able to quickly organise asset finance within 24-hours. Offering a choice of different lenders, the haulier was able to borrow the purchase cost with funding approved at 90 per cent loan to value. Complete Commercial Finance dealt with the paperwork to ensure the agreed sale price was paid within 48 hours.
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