It’s forgivable to be slightly daunted by the world of finances in business, especially if your company is in its infancy. With so many different and usually confusing finance-related terms circling round your mind throughout the year, it can be difficult to keep up with all of your finances on a day-to-day basis when trying to successfully run a business and make a profit.
In this article, we aim to give you a jargon-free guide to what asset finance actually is and give you the answers to some other frequently asked questions regarding the subject.
What is an Asset Finance Loan?
Asset finance is a type of lending that is similar to a loan, but which is secured against a tangible business asset, like vehicles and machinery. This type of loan allows a business to borrow money from a lender over a period of between 12 months and 7 years.
In essence, the lender can take comfort from the fact that their loan is secured by an asset, and in the case of non-payment, they could sell said asset to recover their money. The way this differs from other forms of borrowing or unsecured business loans is that the company must offer up some of its assets in order to quickly secure a cash loan.
Asset finance is usually utilised by businesses that are looking to grow but want to protect their cash flow by spreading the cost over a longer period, rather than parting with a lump sum upfront. A regular charge is agreed upon by the lender and the business borrowing the money; once an agreement is in place, the borrowing company is free to use the asset over the agreed period without having to pay a large upfront sum for the asset.
Why Use Asset Finance?
Asset finance is best used if a borrower wants to acquire a new asset or if they own unencumbered assets that they wish to use to raise funding. In most circumstances, a company will use inventory assets in the borrowing process.
In many cases, businesses opt to use asset finance rather than loans. The main reason behind this, is because lending is secured by an asset therefore it’s deemed to be less risky than an unsecured loan. As a result, better terms are often available such as lower interest rates, longer terms and the finance is more likely to be approved.
This type of funding is used when a business needs to get equipment, machinery or a vehicle to carry out their day-to-day business, without having to worry about the upfront costs. It’s also a great way to build up your business’s assets without having to worry about paying large sums of money upfront; in turn, you can make your operations more productive, grow your business and even earn more money.
Types of Asset Finance
There are two commonly used types of asset finance: Hire Purchase and Lease Financing. Here’s a brief overview of how each of these types of finance work:
Hire Purchase – A hire purchase is a simple way to purchase an asset and spread the cost over a period of your choosing, to be paid back in instalments. With this type of asset finance, you usually pay a deposit upfront and the remaining cost of the asset is split and repaid at a pre-agreed fixed rate of interest per month until the end of the agreement.
At the end of the agreement, you will have the option to gain full ownership of the asset for a small fee, but you’ll be fully responsible for any maintenance and insurance costs it may incur. The item you have purchased will also appear on your balance sheet.
Lease Financing – With lease financing, the company you are borrowing from will purchase the asset in its entirety and you will have full use of the asset throughout the lease.
Simply put, this would be best utilised if you do not have readily available funds to purchase an asset. Some other reasons you may choose to use this type of financing is when you have no interest in owning the asset, as lease payments tend to be cheaper. The lending company will purchase the asset for you, and you’ll pay a series of instalments over a time period agreed between yourself and the lender, whilst being free to use the asset throughout the payment period. At the end of the lease period, you can opt to renew the lease, but this will be subject to an annual rental fee.
The main difference between lease financing and hire purchase is ownership. With a lease, you are paying to use the asset and not buying it. With hire purchase, you will own the asset at the end of the term. It’s also worth noting that lease financing requires a significantly reduced upfront cost when compared to the hire purchase. The remaining cost of the asset is paid back over a pre-agreed fixed-rate of interest until the end of the lease.
Another form of asset finance you may choose to utilise is refinancing. Refinancing allows you to release cash that is tied up in your existing assets which you own, such as vehicles or equipment. Companies who choose to refinance do so to help boost the cash flow in their business, it’s also worth noting that this can be provided on both lease and hire purchase agreements, even if you are still midway through your repayment plan.
The amount you can borrow using refinancing completely depends on the value of the assets involved in the transaction and the affordability of repayments, but this is generally a flexible arrangement. It should be noted, however, that there are a few restrictions to the assets you are able to refinance; it must be a hard asset, with a predictable residual value, and a readily available second-hand market.
Here at Ping Finance, we take great pride in providing asset finance for businesses across the UK. Our team of experts are on hand to guide you through the whole lending process and can help you with any questions you may have.