Asset financing can assist a business in deferring the cost of purchasing or leasing equipment. But how can you choose the best form of funding for your company if there are so many options? We explore the advantages and disadvantages of each option.
Asset financing is a type of loan that businesses use to fund the purchase of assets with a high value, like machinery, company automobiles, or office supplies. It is most frequently utilized by businesses seeking to expand but lacking the available funds to purchase those essential assets immediately or would like to spread the expense over a longer period of time.
How Does Asset Finance Work?
Asset financing can be obtained from a broker, a manufacturer or provider of equipment, a finance company, or perhaps both.
The leasing company will often purchase and own the machinery or vehicle on your behalf if you’re looking for a new physical asset. In accordance with a pre-agreed contract, your company will rent or hire the equipment for a predetermined period of time.
A business finance application requires that you demonstrate your company’s ability to repay the agreed-upon payments, and your credit score will be considered.
The loan is often repaid to the lender over a predetermined length of time in regular installments under the terms of a leasing agreement with a fixed interest rate.
Your company may eventually own that asset at the end of the agreement, buy it for a low cost, continue to lease, update it, or give it back depending on the form of asset financing you use.
Asset Finance is a thriving funding source for UK businesses and startups. With asset finance, a British company uses its assets as security to borrow money or take out a loan against the asset – making it easier to buy, use and benefit from heavy items such as vehicles fleet, plants, and heavy equipment.
What Assets Can My Business Finance?
An asset is an object or resource that has worth and supports the achievement of business goals of expanding or making money. That might be anything from a big freight vehicle to a desk chair.
The two primary categories of assets are:
A hard asset is a tangible, high-value item, such as a car, a tractor, machinery, engineering, and manufacturing equipment, a building, or even a piece of real estate.
A soft asset is any item that may not have much market value after the financial agreement expires, such as office furniture, security systems, catering equipment, IT gear, and software packages.
The Different Types Of Asset Finance
There are several leases and hire-purchase options available, and some of them will be more suitable for the asset you’re searching for than others.
An asset can be purchased by spreading out the expenses over a predetermined period of time. The expense is shown on your balance sheet, and you are in charge of the insurance and upkeep. The asset is yours when the period is through.
This is exclusive to company vehicles and is also known as vehicle asset finance. The car your company requires is purchased by a lender, who is then paid back in installments throughout the course of the lease. The lender is liable for servicing fees, maintenance, and disposal of the vehicle at the conclusion of the lease.
When you use this kind of asset financing, the vendor purchases the asset your company requires and rents it to you. The expense of maintenance and servicing is covered by the provider. When purchasing pricey and high-quality manufacturing machinery, you only pay a small portion of the overall cost upfront, which may be great if you don’t have the cash to purchase it together.
The first month’s rent must typically be paid in full in advance, with the remaining balance being divided up over the length of the lease. You can have the option to either buy the equipment outright or just return it at the conclusion of the lease.
This is a fixed-term rental arrangement under which you will not be required to pay the full cost of the asset, which is often specialized machinery because you will only be using it for a period of time that is shorter than its expected lifetime.
As the business only pays the calculated worth of the item for the short lease time discussed, it is frequently less expensive than equipment leasing. The asset will be returned to the leasing firm at the conclusion of the contract, and it will be responsible for upkeep.
This long-term lease sometimes referred to as a capital lease, is created for the duration of an asset. You are in charge of maintenance and insurance, and you are given complete use of the asset while paying it off over time.
The payments typically continue until at least 90% of the asset’s original purchase price has been recovered by the finance provider. The lender might allow you to get a portion of the value when the asset is sold, but your company won’t be able to purchase it outright.
This choice is a little different in that you borrow money against an asset that your company already possesses, such as a vehicle, equipment, or even real estate, in order to raise the funds it requires. Lenders will base their offer for asset refinancing on the equity they have in the asset. Consequently, you can access funds from physical assets that you only partially own, unlike with a business loan.
For an asset to be regarded as security for your loan, it must be physically moveable. The value of the asset from which you are obtaining funds determines how much you are permitted to borrow.