In order to grow and be successful, your business may need to invest in assets such as new equipment, machinery, or vehicles. But what if you don’t have the cash available to pay for these upfront? Or what if by doing so you put the financial health of your business at risk by creating cash flow problems? This is where asset finance comes in as a potential funding option.
In this guide to asset finance, we discuss what it is, the benefits and different types of asset finance, and when you should consider using it to grow your business.
What is asset finance?
Asset finance gives you access to the assets you need for running and growing your business. This could be anything from standard office equipment to specialist machinery or a fleet of vehicles. With many providers and asset finance products widely available, it’s possible to find funding for just about any business asset.
Simply put, equipment is purchased by the asset finance provider, who then makes the assets available to the business in exchange for regular payments over an agreed period. By spreading the cost, you can get access to high-quality equipment or machinery which you might not be able to afford to buy outright. It also means that you can expand your operations without putting a strain on working capital. As most asset finance agreements involve making fixed payments at a fixed interest rate, you can manage cash flow and plan your budget more effectively.
Can you only finance new assets?
In short, no. Asset finance providers will consider purchasing secondhand assets, as long as they are in good condition, have a usable life remaining, and are sold by a reputable supplier.
You may also be able to unlock value in assets your business owns through asset re-finance. This can be a really effective way of quickly generating significant sums of capital for investment in growth or to deal with the unexpected.
We’ll now talk about the different types of asset finance in more depth:
Hire purchase involves the business agreeing to lease an asset from an asset provider through fixed regular instalments plus interest over an agreed period, usually with an initial deposit. Once you have made the payments, you’ll have the option to purchase and gain full ownership of the asset, typically for a nominal fee.
Hire purchase contracts, as with other forms of asset finance, can be flexible in that you can often choose the term, payment and interest structure, as well as the amount of the initial deposit to suit the nature of your business and your financial situation. For example, a large payment at the end of the contract known as a ‘balloon payment’ can sometimes be made to reduce the cost of the regular instalments. Or, if you have a seasonal business, you may be able to determine a seasonal payment schedule at the outset of the agreement to allow you to manage your cash flow better.
During the hire period, insurance and maintenance responsibilities generally sit with the finance provider, but capital allowances are available to the business.
If you require an asset for long-term use and want to ultimately own it, then hire purchase could be a good option for your business.
This form of asset finance consists of the finance company (the lessor) purchasing an asset that you require and renting it to you over a specified period of time. There are two main types of equipment leasing:
Finance leases, also known as capital leases, allow you to acquire exclusive use of an asset for most of its useful working life without owning it. It involves paying a series of instalments or rentals which amount to a large part or the full cost of the asset, plus interest – this is known as the primary period of the lease. At the end of this period you have a number of different options, which include:
- Extending the lease into a secondary period and continuing to use the asset as needed
- Returning the asset to the lessor
- Selling the asset on behalf of the lessor and benefiting from a proportion of the sales proceeds
In many ways finance leases are similar to hire purchase. While you don’t actually own the item with a finance lease, you take on many of the risks and rewards of ownership, such as responsibility for repairs and maintenance. However, hire purchase and finance leases have different accounting treatments and tax implications. Capital allowances are not available but depreciation is usually a tax deductible expense.
This is where you rent an asset for part of its useful working life. Operating leases typically consist of shorter lease periods, and you don’t have to take on the risks and rewards of ownership. They can be a more flexible option than hire purchase or finance leases. They’re particularly suitable if you need to upgrade your equipment frequently in order to have the latest technology. At the end of the lease, you can choose to extend the agreement or return the asset to the lessor. As this is a rental arrangement, costs are revenue tax deductible expenses and so no capital allowances are available.
Asset finance can be a good option if you’re looking to further your business’ growth by getting access to the latest equipment or unlocking cash from assets you already own. With various types available and the tailored nature of many asset finance agreements, this is an area of funding that often offers choice and flexibility. To explore the other funding options available, check out our guide. For information on how to grow your business with loans and/or equity, visit our growing a business page.