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.
You may need to buy a vehicle or another piece of expensive equipment or machinery, but you don’t yet have the working capital to pay for it. A common scenario being a gym or sports club who require new or improved sports or gym equipment finance
Sound familiar? Don’t worry there are a number of finance options available to you as a small business if you need to invest quickly. If this sounds like you, then asset finance is probably what you’re looking for.
Equipment financing will allow you to get the equipment you need and make regular fixed payments against the overall cost. The same goes for business car, truck, machinery or any kind of vehicle finance. You won’t need to tie up a huge amount of cash and you can pay for it over a term that reflects how long you’re going to be using it.
If you need an expensive vehicle or piece of machinery to grow your business, then there’s a 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 do different types of asset finance work?
Many funding providers offer different kinds of asset finance products. But, broadly speaking, there are two kinds:
Hire purchase and
Let’s deal with hire purchase first.
What is hire purchase finance?
Well, it’s an established and very popular method of funding for small businesses. Put simply, it's a way for an SME to buy an asset in small instalments while making use of it immediately. Plus, with hire purchase finance, once you have completed your repayments you own the asset outright. For tax purposes you are the owner of the asset and you can normally claim capital allowances.
The downside of hire purchase is that you’ll typically need to pay a deposit. This is normally between 10 and 20 percent of the value of the item.
However, keep in mind depreciation – in other words the reduction in value of an asset over time. Some items age better than others, and on the plus side, the SME will get the benefit of depreciation on the asset for tax purposes.
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.
As mentioned above, almost all hire purchase agreements require you to first pay a deposit. Check with your finance provider and read all documentation carefully before taking out any agreement.
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.
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 repayment 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.
Still not sure if asset finance is right for your business?
If this is the case, there are other options available to you.
Have a read through our guide to business loans as this may be a better option…