Asset finance explained
Whether you're starting up or growing your business, there will be times when you need to invest in new or replacement equipment to get the job done.
Asset finance is a lending agreement that is used to obtain the tools of your trade, such as furniture or machinery - without having to pay the total cost up front. It can also be used to refinance assets to release equity.
What is Asset Finance?
It is a financial solution for companies that need to purchase equipment without paying for it up front. With asset finance packages, hire purchase and leasing, you can breakdown the payment of your assets into monthly, bite-sized chunks. This makes the investment much more affordable and has less of an impact on your cash flow. It also allows you to develop and grow your business without experiencing hold-ups while you wait for the cash available to make the purchase you need.
Whatever your business, in order to achieve growth, it is likely that you will need invest in assets along the way. This may include the purchase of equipment, new computer systems and software, new machinery or a commercial vehicle, all of which can involve a significant outlay - something not all businesses have the ability to accommodate through cash flow.
With asset finance, you have the ability to spread the cost of investment, breaking these down into more manageable payments. This helps to make the investment more affordable and has a lesser impact on business cash flow, allowing you to concentrate on making your enterprise thrive. It can also yield tax benefits, although it is always advisable to consult with your accountant. The exact terms of your agreement for asset financing depend on whether you choose to use hire purchasing, leasing or refinancing.
Whereas banks are unlikely to lend money on assets without security. Asset finance is a popular option for you to acquire vital items quickly and easily for your company, without overstretching your finances in the short term. Using asset finance makes it possible for you to keep your accounts on track while still being able to move forward with your business ideas, because it allows you to invest in the equipment you need.
Asset finance gives you the opportunity to purchase a higher standard of equipment for your business than you might have been able to otherwise and, as long as you keep up the regular payments, the agreement can't be cancelled - so you won't be left high and dry without the asset you need for the smooth running of your business.
How does asset finance work?
Also known as 'leasing', a finance lease is very similar to renting the equipment, in return for payments which are usually offset against taxable profit. The range for a finance lease is normally between one and five years and is designed to last until the equipment expires - although you can renew and continue to 'lease' it.
Finance leasing provides flexibility and freedom - you don't have responsibility for something that you do not own.
Hire Purchase (HP)
Also known as a Lease Purchase, a Hire Purchase is very similar to finance leasing, except once you get to the end of the 1-5 years, instead of handing back the equipment, you own it.
It allows you to spread the cost of purchasing equipment, which is ideal as long as the well-being of the assets is maintained and looked after.
Contract hire is very useful for vehicles, whether you're looking to purchase a van or more specific equipment - such as a tractor or a digger. The payment methods are made on the value of the asset (vehicle) and are spread over a specific term.
Repayments are based on the asset value and the costs are worked out over the length of the agreement.
This type of asset finance is a good match for businesses that rely heavily on the use of technology. If you use an operating lease, your payments only last until the expiry date has been reached. Once the asset stops being useful, you pay the difference of the original price and the residual value, once the agreement has expired.
Refinancing allows you to revise your payment schedule when repaying your debt. It also enables you to renew your loan, therefore replacing an old loan with a new one. Refinancing is useful if your credit ratings are poor. For example, instead of using several credit cards with different interest rates, it will allow a loan with the same amount, which will then drop the interest down, as it is only one loan you are paying back.
What are the benefits of asset finance?
- You are not required to pay the total amount of the asset up front
- It can be fast and simple to arrange
- Fixed payments can make it easier to control finances
- It allows you to purchase higher specification equipment
- The substitute finance option leaves bank facilities unaffected
- There are potential tax benefits (for clarification, please consult your accountant)
- Risk is reduced – if you can't keep up with payments, you'll lose the assets but not your home
- No responsibility – if the asset breaks, the leasing company carries the risks
- Easy to upgrade
- Ensures you can plan around your payments and budget
What are the questions to consider when deciding to use asset finance?
- Can I still claim capital allowances on my leased assets?
- What are the cancellation terms?
- Do I have access to funds for the initial deposit and first payment?
- Will extra credit rating guarantees be required?
Asset finance by industry
Whether you’re in farming, breeding or processing, it is likely that, at some point, you will need to invest in equipment – be it to replace old machinery or to buy new items to expand the business.
Unfortunately, not all businesses have the ability to invest the full amount up front due to cash flow. That’s why many firms turn to asset finance as a solution.
When it comes to agriculture in particular, a lot of equipment is needed to sustain a business and ensure a profit is being made. It can be very hard to take control in what is a very competitive industry.
To keep up with the competition, agricultural specialists need to invest in the best products. Asset finance can support you in purchasing equipment such as:
- Combine harvesters
- Robotic milking machines
- Milking parlours
- Solar panels
- Crop sprayers
- Biomass boilers
- And renewable assets to name a few
Engineering is a very wide-spread field, encompassing building, communications and even civil engineering.
The high demand for engineers means that resources are also consistently needed and can have a weaker life span. Businesses cannot always fund the equipment so regularly where and when it is needed, because of their cash flow.
Asset finance allows the cost of the equipment to be spread by breaking the total cost into payments that are affordable.
Asset finance can be used to fund equipment such as:
- Profiling machines
- Grinding machines
- Machine centres
- Milling machines
- Press brakes
The merchandise that is produced through manufacturing caters to all types of trades and businesses. The pressures to produce the volume of goods required and to deadline can be immense.
Creating your merchandise can be delayed due to your cash flow but it is significantly essential to have equipment such as:
- Woodworking machinery
- Conveyor belts
- Packaging machinery
- Food processing equipment
- Machine tools
- Plastic machinery
Asset finance will allow you to pay for the equipment in smaller instalments, so there is no reason for delay or finance struggles.
A large number of businesses depend solely on technology and if they cannot afford every piece of crucial software (never mind the basics like computers and printers) then it could potentially destroy a business.
Asset finance will allow you to purchase the equipment you need, without actually owning it. It will also help you with payments towards new technology, as the instalments are made according to what you can afford. This will allow your business to purchase every crucial piece of equipment you need whether that is:
- Telecoms systems
- Point-of-sale equipment.
The most common types of equipment that are financed are:
- Telephone systems
- Mobile devices
- Data centres
Whether it’s a company car, a recovery vehicle or a white van, transport is crucial for many businesses. As transport can be very expensive it is not always possible that you will have the cash flow to support your needs.
Many businesses depend heavily on reliable transport, so it is important to have everything you need to ensure growth and profit. Asset finance will support vehicles such as:
- Vans (LCV’s)
- Buses and coaches (PSV's)
- Trucks (HGV’s)
Waste Management and Recycling
To maintain your working environment, it is crucial you have some sort of waste management system and a routine of recycling. With a massive increase in the enforcement of recycling schemes across Europe, the pressure is mounting for businesses to become environmentally friendly.
As many businesses won’t see this as a priority, the funds won’t always be there for you. Essential products that will allow you to prioritise waste management and recycling are:
- Wheel loaders
- Waste processing and separating systems
- Top load excavators
- Mobile washing units
- Shredders and trammel screens
- Transportation tanks
- Crushers and tippers
- RDF plants
- Recycling processing equipment
- Composting equipment
- Separation equipment
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