Asset Finance Explained With Examples
If you own or will soon need to own significant physical assets, you probably run a small business.
Whether it’s office equipment like tables and chairs or some heavy items like machinery or vehicles, these are the tools that will help your company succeed, grow, and thrive.
So, what exactly is asset finance?
In short, asset finance is essentially a loan that can help your business raise funds to buy or replace assets in a cost-effective manner.
It’s explicitly used to purchase or lease the products you’ll need to run your business. You’ll probably need it if you want to grow your business, so this article aims to let you know all that there is to know about asset finance. But first, what are assets?
Assets are items owned by your business that will not be sold as product or service. Depending on the type of business you have, an asset could be tangible or intangible.
It could be your office chairs, computers, and any other equipment. This could be your printing equipment if you own a small publishing company.
If you own catering business, your assets could be refrigerators and ovens. And if you run a farming business, vehicles such as crushers and tractors could be your valuable assets.
Lending Against Existing Assets VS Lending Against Future Assets
Asset-based finance encompasses both the refinancing of existing assets and the hiring or leasing of new assets.
Refinancing existing assets refers to what you do with equipment that you have already purchased. You can do this to free up the capital locked up by selling assets to a lender who would then lease them back to you.
The other kind of asset-backed financing allows you to buy or lease new assets. Both types of asset financing enable users to access business assets.
Asset Finance Is Intended For Whom?
Asset financing is intended for all types of businesses, including small and medium-sized enterprises (SMEs). It is intended for those who want to gain access to a high-value item to help their business grow while spreading the cost of the item over its useful life.
Asset financing is also available to limited companies and partnerships, sole proprietors, and public limited companies.
There are many types of asset finance, and understanding which one to use can save your company time and money, offer additional tax benefits, and reduce the likelihood of working with obsolete equipment.
Your tax advisor or accountant at your company can assist you in making the best decision.
Types of asset finance
1. Hire Purchase
Hire purchase is a popular type of asset-based lending. With hire purchase, you can purchase an asset and pay for it in instalments, allowing you to get the asset right away while spreading the cost over time.
After you’ve made all of the payments, you’ll have full ownership of the item. Hire purchase agreements typically last for one to six years.
You would be required to pay a deposit before fixed monthly instalments for this type of asset lending. You will also be accountable for the asset’s maintenance and insurance costs.
2. Equipment financing or leasing
If you don’t want to buy the asset, you have an option to lease it from a lender. Then, you can pay monthly instalments for the time you use it.
You do not emerge to own the item in this structure, but the beneficial effects include having the thing right away. Only a fraction of the total amount is required upfront.
One of the advantages of leasing equipment is the flexibility with the arrangement. This is helpful if your business changes or the assets you require or desire change.
3. Asset refinancing
If you’ve invested in equipment and want to free up a few of the capital that’s been tied up, this type of asset lending may be appropriate for you.
A lender purchases your equipment and leases it back to you over a set period. You will make periodic payments over that time.
4. Finance or capital leases
A finance lease, also widely recognized as a capital lease, is a form of business asset financing. It falls somewhere between purchasing and leasing equipment. It is an extended lease that covers the majority of the asset’s life.
You have complete access to it and pay the total value for it over time. However, you do not own it. If you chose to pay smaller instalments over a prolonged period, you should think about it.
5. Operating lease
Operating leases are closely related to finance leases in that the company that leases you the item is accountable for the cost of maintenance.
Asset financing enables you to maximize the value of assets you already own, as well as purchase or lease new assets for your business.
It is critical to determine which type of corporate asset finance or asset finance loan is best for your company.
Once you’ve determined the timeline for repayment, make sure you’re only spending for assets that you still require.
If you have any doubts regarding the same, you can hire accountants in London who will help you understand the various asset financing types.