By: Hassan Hosseini
Phd in Finance
Investment&Finance Advisor for Real Estate
Asset finance is a type of business funding that enables you to access an asset for your business by paying for it in instalments – or leasing it – over a set period of time. You name it, there's probably an asset finance product for it; from vehicles and machinery to kitchen equipment, office furniture, IT equipment, and more.
It’s important not to confuse asset finance with asset refinance. While the former lets you buy or rent an asset without the large upfront capital expenditure, asset refinance enables you to release the cash value of an asset you own. In other words, the asset is transferred to the lender as collateral in return for a business loan.
Types of asset finance
As a business owner, you might decide to use asset finance if you can’t afford to buy business critical equipment upfront. You may also use it if you would rather make smaller payments over an agreed period than a large upfront expenditure. As with many types of business finance, fees and interest payments apply.
Here are the five main types of asset finance:
1. Hire Purchase
If you want to own the equipment or machinery when you come to the end of the term, hire purchase could be the asset finance type for you. Once you’ve met the repayments the asset is yours to keep.
It’s likely that the asset will be a positive item on your balance sheet from the start of the term, but bear in mind that the finance provider will own it until you’ve paid it off.
You’re responsible for maintaining the asset and you can’t sell it until the term has ended, or – if the finance agreement allows – you’ve settled the contract early.
2. Hire purchase with Balloon Payment (Business Contract Purchase)
There is a type of hire purchase where the monthly payments are reduced so they only cover the interest on the loan. The final (or ‘balloon’) payment is used to repay the loan. Although the monthly repayments are lower, the total cost is higher.
3. Finance Lease
If you opt for a finance lease the finance provider will purchase the asset and rent it to you. You’ll make monthly repayments until you’ve covered the cost of the asset (plus the interest). You’ll also be responsible for insurance and maintenance.
You’ve got three options at the end of the term:
Carry on renting the asset
Return the asset
Sell the asset on behalf of the finance provider
4. Operating Lease
If you need an asset for a specific period of time, an operating lease might be the most suitable form of asset finance to explore. You can take out an operating lease on equipment for a set duration – and even upgrade to a newer model within the rental period, depending on the agreement.
Unlike a finance lease, the finance provider is responsible for the asset’s maintenance throughout the finance agreement.
5. Contract Hire
Do you rely on fleets? Contract hire is used for leasing vehicles. Acquiring and maintaining fleets can be very time-consuming; with contract hire, the provider sources and maintains the vehicles. You make payments over a set lease term.
Asset finance advantages and disadvantages
Asset finance can make it easier for you to access high value items that you otherwise wouldn’t be able to pay for. It’s also a way to avoid locking your capital away in a big purchase (that could depreciate down the line).
Asset finance makes it easier to raise funds than with a traditional business loan.
By allowing you to avoid large and burdensome upfront payments and (depending on the type you choose) ownership costs like maintenance, you can achieve better cash flow in your business. However, as with any type of finance, there are advantages and potential disadvantages to consider before making a decision.
If you don’t adhere to the agreement you’ve made with the lender, they could repossess the equipment or machinery, leaving you unable to meet customer demand.
Asset finance potential advantages
Small or no upfront costs
Faster access to business assets
The value of the asset is spread over the term
The asset acts as collateral for the finance
Maintenance is often – but not always – handled by the provider
Maintain control over working capital
Freed up capital can be used to fund other business activities
Fixed interest rates and monthly repayments aid cash flow management
Access to new and efficient assets can give you a competitive edge
Asset finance potential disadvantages
You may never own the asset
The asset will be repossessed if you don’t meet the repayments
The minimum term is usually one year or more
You may be liable for damage
There could be a limit on the usage, e.g. mileage for vehicles
Applying for asset finance
Asset finance gives your business a cash injection to buy assets without putting cash flow at risk. At Funding Options, we provide SMEs access to the most extensive range of business finance on the market, including a variety of asset finance options.
We can match you with the best asset finance solutions for your needs. We’ll guide you through the application process and make sure you get the best deal. Whether you’re looking for asset backed finance to ease cash flow or a lease option to hire equipment for your growing business, start your funding journey with us today.
