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Asset Finance – spreading the cost of business equipment
Asset finance is a type of borrowing for business. It’s a way of raising funds to buy equipment or machinery that your company needs to grow. We explain how it works and what to consider.
What is Asset Finance?
Asset finance is essentially a way to spread the cost of buying business equipment, rather than paying a large upfront sum. There are various different ways you can fund asset purchasing, which each work in unique ways.
What are the different types of Asset Finance?
There are numerous options in asset finance, as highlighted below. Our advisors will help you identify which are likely to be the most suitable choices for your business.
Hire purchase/lease purchase
Much like leasing a car, your company receives equipment and pays a monthly fee to the provider. The equipment remains the property of the company you hire/lease it from.
You might make a larger initial payment followed by smaller payments on an agreed schedule. At the end of the agreed period, you usually have the option to to buy the item outright with a further payment.
Finance lease (or capital lease)
Again, payment is made with regular payments to an agreed schedule. But with finance lease you do not own the asset or have the option to buy it at the end of the plan.
Equipment leasing is similar to finance leasing, as you rent the item for a regular fee over an agreed period. At the end, you can choose to extend the lease, upgrade the item, buy it at an agreed sum or return it. The key difference between equipment lease and hire purchase is that you don’t have to pay for maintenance or servicing.
Operating leasing is similar to equipment leasing but usually for equipment or machinery that you only need in the short term, or will not ultimately want to buy.
There are two types of asset refinancing. The first is where a company uses its assets as security to borrow money. Invoice financing is an example of this, where you borrow against your accounts receivable.
The second type, also called asset-based finance, is where your company sells an asset to a finance provider for an agreed lump sum. You then lease the asset back from the finance provider – so you repay the lump sum received over time.
Contract hire (or vehicle asset finance)
This asset financing only applies to vehicles. You approach a contract hire provider who sources the vehicle(s) you need, and you pay a monthly amount over the agreed leasing period.Maintenance and servicing costs remain the responsibility of the provider.
Advantages and disadvantages of Asset Finance
The main advantages of Asset Finance agreements are:
Less pressure on cash flow.
You can obtain and use essential equipment without paying a large sum upfront, making it easier to manage your cash flow. Most agreements have fixed interest rates so you can budget effectively.
Less risk than a business loan
There are no penalty charges if you miss a payment; the risk is that the equipment is taken back. You are only paying for what you need.
The key disadvantages of this approach are:
It’s usually more expensive to use asset financing than buying an asset outright. You may also need a deposit or advance payment at the start of the agreement.
Equipment funded through asset finance is not necessarily tax-deductible from your profits.
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Who is Asset Finance good for?
Asset finance can be a good option for small businesses that want to fund equipment through their working capital rather than invest a large lump sum up front.
Years ago it was mainly used by larger organisations, but it is now accessible for smaller operations, including sole traders and small to medium-sized limited companies.
How long can you take Asset Finance out for?
The length of asset finance can be short term or long term, depending on the item that you need and how long you want it for. Typical contracts might be a year, up to seven years, or longer for a high value item.
How can a broker like GPS Financial help me with Asset Finance?
GPS Financial is trusted by many small businesses to advise you on business borrowing. Whether you need purchase finance or other solutions to secure a loan, we will explain all the options available to you.
Balance sheet assets are a crucial part of operation for many businesses, but it’s important to ensure that you have a competitive deal in place and that you’re working with a trusted, credible supplier. Business asset finance is not regulated by the Financial Conduct Authority so make sure you get good advice from a qualified professional.