Asset Finance Hub
What to look out for
- Red Identify the right kind of asset finance for your needs – hire purchase or leasing
- Amber Pay for that expensive piece of kit in small manageable chunks
- Green Secure the asset to help your business grow without your cash flow taking a hit
What is the definition of asset finance?
Asset finance allows you to borrow against the value of the equipment you need. Take, for instance, construction or company car finance, it’s basically a form of financing that allows SMEs to get their hands on an expensive asset quickly while paying back the debt in small manageable instalments plus interest.
It means you can get started using otherwise expensive machinery or equipment without having to make a large, possibly prohibitive payment. Good examples include machinery, vehicles and some kinds of technology.
Why would you use asset finance?
Asset finance is a very popular type of alternative funding for small businesses. You will have probably heard of hire purchase finance, which is a common type of asset finance.
In a nutshell, it’s financing that enables small businesses to obtain an essential asset without having to make a large upfront payment, other than a deposit.
Many small businesses use asset finance on a daily basis. Common examples include van or truck finance, company car finance or gym equipment finance.
If you need an expensive vehicle or piece of machinery to grow your business, then there’s a good chance asset finance is a good option. Businesses in a wide range of sectors use it to finance assets worth anything from a few thousand to a few million pounds.
How does asset finance work?
Many funding providers offer different kinds of asset finance products. But, broadly speaking, there are two kinds: hire purchase and leasing. Let’s deal with hire purchase first.
Hire purchase explained
Hire purchase is a way for SMEs to buy an asset in small instalments and make immediate use of it. Once the final payment (including interest) is complete, you own the asset outright.
With leasing you don’t own the asset from the start. You need to complete the payment programme and then you get an option to buy it outright. Alternatively, you could begin a new leasing agreement with a new asset. In some leasing agreements you can upgrade mid-contract, or your vehicle or machine supplier could agree to service or replace it if something goes wrong.
Just make sure you read and understand the terms and conditions from the start.
What are the costs of asset finance?
Asset finance is good news for your cash flow, as it means you can pay for that expensive piece of kit in small, manageable payments, plus interest.
With hire purchase agreements, you must first pay a deposit. This is typically between 10 and 20 per cent of the total value but check the terms of the agreement.
A couple of advantages of asset finance are that most agreements have fixed interest rates and fixed payments. This makes it easier for SMEs to budget and manage cash flow. Two things close to your heart.
You can also agree on the time frame for repayments – typically from one to five years – to make payments more manageable.
However, you should also consider the following:
Firstly, if your cash flow takes a downturn and you can’t make all of the payments, then you may end up losing the asset.
Secondly, when you include all the interest rates over the full length of the repayments schedule, you can end up paying substantially more than the value of the asset than if you purchased it outright. But naturally this is the trade-off for not paying the whole sum up front.
When you apply for asset finance, bear in mind that funders will offer different finance products with a range of pricing models. We advise discussing the price of lending at the earliest stage in the process. Many lenders will have a menu of charges they will be happy to share.
How long does it take to secure asset finance?
One of the benefits of asset finance is that it is easier to obtain than a traditional bank loan. Depending on the lender, you could get an initial decision in as little as 24 hours, but this depends on the lender and other circumstances, such as the amount of money being borrowed.
Once an initial decision is made there is typically a short period where formalities are arranged and settled before the finance becomes available to your business.
What type of security do I need for asset finance?
One of the big attractions of asset finance is that because the asset itself effectively acts as the security, lenders are less likely to ask for personal guarantees. However, additional guarantees may be requested if your business is developing or your balance sheet shows you are borrowing heavily.