Everything You Need To Know:
Understanding Asset Finance What is Asset Finance?
Asset finance helps make the acquisition of crucial assets possible for thousands of businesses, by reducing payments into smaller, more manageable monthly chunks. Businesses can benefit from being able to use the asset straight away, despite not having paid it off in full.
As your business continues to develop, chances are you will need to free up significant working capital to fund new assets like machinery and equipment, which will help to make business growth more manageable. Purchasing large assets upfront can be an expensive venture, and not every small business can easily afford one-off payments at such scale.
However, with asset finance your business will have the freedom to take advantage of those expansion opportunities, without compromising crucial cash flow or the running of day to day operations.
Types of Asset Finance
There are two main types of asset finance available to businesses like yours - lending that is used to acquire additional assets and lending secured against assets your business already owns. Within these two broader categories, the following types exist:
- Hire Purchase
- Finance Leases
- Asset Refinance
However, if there is anything you’re confused about, please feel free to contact us via phone or email and one of our commercial directors will be more than happy to assist.
Hire Purchase What is Hire Purchase?
Hire purchase (HP) is the most common form of finance for businesses that want to purchase goods without paying off their full value immediately. Lenders offering hire purchase agreements enable businesses to spread the total cost of the item over a longer period of time.
During this period you essentially hire the asset and pay the lender in monthly instalments over a pre-agreed term. Once the asset is paid off in full, it becomes yours to keep.
How Does Hire Purchase Work?
- The first step to securing a hire purchase agreement is putting down a deposit on the asset your business needs. Deposits for this type of borrowing typically start at 10% of the item’s total value.
- Once the HP arrangement has been made, you will repay the remaining amount in affordable fixed payments, usually over a period of 1 to 5 years.
- Before taking ownership of the item you will be required to pay a final fee to the lender, which is a small percentage of the asset’s overall value. From the onset, you become responsible for its maintenance but you will also benefit from being able to use it without delay. When thinking about tax, it’s important to be aware that the asset will appear on your company’s balance sheet from day one.
Is Hire Purchase Right For Your Business?
This type of asset finance is commonly used in industries where the upkeep of expensive machinery is required - construction, manufacturing, engineering and transport services are the sectors where small businesses apply for hire purchase agreements most regularly.
Such agreements are available to the majority of businesses big and small in the UK. When making an application you will be required to prove to the lender that your business will be able to upkeep hiring payments so a strong credit score is a must.
- A huge advantage of hire purchase is the variety and flexibility of repayment structures. This adaptability allows for seasonal businesses to access funding by factoring in a larger ‘balloon’ repayment at the end of the agreement, reducing the fixed monthly costs.
- Unlike with secured funding, no collateral is required for a business to secure a hire purchase deal.
- Access the business equipment you need immediately (without paying hefty upfront costs).
- Certain finance charges for assets are tax deductible.
Expert Advice: Be aware that if your business no longer needs the asset you are hiring, early termination charges can apply.
What types of assets can be financed?
- Hard Assets - Are tangible items both new and used, like machinery, plant and manufacturing equipment that have a resale value at the end of the agreed hire purchase term.
- Soft Assets - Differ from hard assets in that they typically have little to no resale value. Examples of sort assets can include software, materials, fixtures and fittings. Soft assets get termed unsecured assets and the decision to lend against them gets based largely on the strength of the business and the availability of a director’s personal guarantee.
Lease Financing What Are Finance Leases?
Lease financing, also known as equipment leasing is an agreement whereby the lender buys the asset your business requires outright, then rents it to you on a lease. A lease is a contract between two parties where one party passes on the asset for a specified term, in return for periodic payments.
How Does Lease Financing Work?
With a finance lease, your business is only required to pay a small portion of the asset’s total cost and can benefit from using the item straight away.
Unlike hire purchase, an initial deposit is not typically required to be put down. This is because your business is paying to use the asset instead of paying to own it. Instead of paying a deposit, the first stage of a finance lease agreement will see your business pay the first month of ‘rent’. VAT on the asset gets spread across the entire leasing period.
Toward the end of the lease, the lender will give you the option to:
- Renew the lease contract and continue hiring the asset.
- Purchase the asset outright at an agreed price.
- Simply, return the asset.
Is Lease Financing Right For Your Business?
The flexibility of equipment leasing makes it particularly attractive to businesses. As opposed to purchasing technology, machinery or equipment that can quickly become out of date, a finance lease can help your business stay up to date with the latest model of the asset available on the market.
Industries that are required to update their equipment, machinery, vehicles or technology regularly find leasing an extremely valuable option. An example of this is the UK fitness sector, a £5 billion industry that has grown by 20% in the last four years alone, it relies heavily on leasing and gym equipment finance. Machines like treadmills and rowing machines suffer a large amount of wear and tear on a daily basis, so there is a substantial, continuous need to pay for replacements and upgrades.
- You are able to reclaim VAT on leased assets and can often offset your claims against business profits.
- Access the business equipment you need immediately (without paying hefty upfront costs).
- Freedom to choose - you decide whether to renew the agreement, return or purchase the equipment at the end of the term.
If neither hire purchase nor lease financing feel right for your business, you might want to consider equipment financing.
Equipment finance provides yet another solution to businesses in need of crucial assets. Tailored repayment plans are available and similarly to its asset finance counterparts, equipment finance loans offer fixed monthly repayments at a pre-agreed interest rate, keeping costs at a low.
Because equipment financing can be arranged quickly, often in less than 24 hours, they are the ideal choice for when equipment breaks unexpectedly, and you haven’t factored new purchases into your monthly budget. « Show Less
The Annual Investment Allowance
When purchasing assets, be sure to familiarise yourself with the UK’s Annual Investment Allowance first.
In 2008, the UK Government brought in an initiative called the Annual Investment Allowance (AIA) to encourage businesses to invest in machinery, equipment and assets needed for growth following the recession. Available to all limited companies, sole traders and partnerships, the AIA is an allowance that allows businesses to write off 100% of qualifying capital expenditure up to a £500,000 limit against taxable profits.
The AIA simplifies tax and helps businesses cash flow by accelerating the tax reliefs available. Relief can be claimed in the same year of investment, as opposed to over a number of years.
Asset Refinance Understanding Asset Refinancing
A third way of maximising expansion and development for your business is through asset refinance. This type of asset finance works best for businesses that already own expensive machinery, equipment or vehicles.
As there is substantial equity locked up in such items, this form of asset finance works to release the equity quickly and efficiently - providing you with the cash needed to purchase newer assets necessary for business growth.
How Does Asset Refinance Work?
The assets you own should have a slow depreciation rate, in order for their value to remain over time. Asset refinance lenders will want to know what the item is, how it gets used and how much it is worth. For the third question, a qualified surveyor will be required to complete a valuation of the asset to determine this.
An example of secured funding, asset refinance describes the process of securing a loan amount against valuable assets that your business owns. Once you receive the loan, you temporarily pass over ownership of the asset to the lender, and when the loan has been repaid in full, it is transferred back to your business. However, if your business is unable to keep up with loan repayments, the lender takes ownership of the asset as a means of getting their owed money back.
- Asset refinance is a cost-effective way of consolidating existing equity and releasing new cash into your business.
- Most lenders will consider a wide range of items as eligible for refinancing.
- Long repayment terms of 1 - 5 years keeps fixed monthly payments at a low.
How Much Can You Borrow With Asset Refinance?
The amount you are able to borrow will largely correlate with the value of the asset you are putting forward as security. When the surveyor completes their valuation they will determine the asset’s:
- Value in the current market
Asset Refinance Repayment Periods
As with purchase hire and equipment leasing, asset refinance loans are paid off in fixed monthly repayments over a term that can be extended from 1 to 5 years.
When applying for asset refinance, you and the lender will agree on an amount that is required to be repaid each month, until the entire loan has been paid off with interest. As mentioned previously, because asset refinance is a type of secured funding, if your business forfeits repayments, the lender reserves the right to remove the asset from your business to recover their losses.
Making Your Choice Which Type of Asset Finance is Best for my Business?
Payment preference is usually the driving factor for any business owner determining which type of asset finance is best for their business. Finance leases typically have lower upfront charges and the cost of VAT can be spread over the monthly payments. On the other hand, with hire purchase, there is a larger amount required to be paid upfront, and the asset appears on the business’ balance sheet straight away.
If you don’t think your business will benefit from the asset for a lengthy period of time, you might want to consider opting for a finance lease agreement. At the end of the agreement, if the asset is no longer useful to the company, you can simply choose not to renew the contract.
If you still can’t decide which type of asset financing would be best for your business, get in touch with us and one of our commercial directors will talk you through your options.
For more information, refer to the Finance & Leasing Association - the UK’s leading trade body for firms providing asset finance since 1992.
Find Out More FAQs
Get the answers to all your questions about asset finance below.
When Will My Business Gain Access to the Asset?
Opportunity waits for no one. Asset finance is an easily-accessible and fast way of maximising growth and development opportunities as and when they come knocking. After signing a hire purchase or finance lease agreement, the asset your business requires becomes available almost immediately.
Most asset finance arrangements can be finalised in just 24 hours or one working day, which means there is no delay in receiving the asset at hand.
How Much Can I Borrow Using Asset Finance?
With asset finance, the amount you are able to borrow depends largely on three factors. The type of asset your business needs, its value and your ability to make repayments.
The lender will ultimately decide what they are willing to lend and who they are willing to lend to, so a strong credit score and clear repayment strategy are essential for any prospective businesses applying for asset finance.
What Can I Use Asset Finance For?
As discussed in this guide, the uses of asset finance are extremely varied so there are no stringent rules. Asset finance can benefit any business - from caterers in need of kitchen equipment to farmers in need of agricultural machinery.
Most business owners would agree that the flexibility associated with this asset finance is an attractive offering. Not only do you get time to decide whether you want to purchase the item or merely lease it, the smaller repayments mean you can keep better control of company cash flow.
Whether you are a startup in your formative years, or a more established medium enterprise in need of technology, machinery, equipment or business vehicles - then asset finance is undoubtedly an option worth exploring.