Asset Financing

What is asset finance?

It’s a type of lending which allows you to borrow money for your business or company.

Business asset financing lets you release cash from your business assets such as property or machinery which can be used as security to finance goods to generate further income or grow your business.

For example, an asset loan could be used to acquire new vehicles to evolve your delivery business without having to buy them upfront.

What is an asset?

An asset is an object or resource that has value and can be converted into cash. An asset can be classed as fixed or current.

Fixed assets, also known as tangible assets, are things like:

• Buildings and property
• Land
• IT equipment and software
• Fleet vehicles
• Tools and machinery

Current assets, also known as liquid assets, are things that can be turned into cash more quickly, like:

• Cash at bank
• Money owed by customers
• Stock available for purchase
• Leased office equipment
• Shares and short-term investments

How does asset financing work?

Commercial asset finance works in a similar way to a secured personal loan.

With a secured personal loan, you pay it back with interest over an agreed period, but instead of using your home or property equity as collateral - your business can offer a wider range of assets as security for the loan.

There are two main approaches to asset finance loans: borrowing money against balance sheet assets or using finance to lease or buy business equipment.

Asset finance for equipment allows you to:

• take full ownership of the acquired asset
• renew the lease or upgrade
• return the asset

What are the different types of asset finance?

Lease purchasing

This works in the same way as hire purchase for individuals. Equipment or machinery is leased over an agreed term and you pay a fixed, regular sum. Your business will be responsible for maintenance and servicing. At the end of the agreed period, your company can choose to buy outright or continue with a renewed lease.

Equipment leasing

With equipment leasing, the lender buys the equipment required and then rents it for a fixed fee over an agreed term. Once that period ends, your business can either extend the lease, upgrade, buy, or return it to the finance provider.

Unlike hire purchase, maintenance and servicing costs are down to the provider, which means your firm has fewer outgoings.

Capital or finance leasing

Finance leasing is more akin to simply renting an asset without the option to purchase the items outright. Payments are made to an agreed schedule but unlike hire purchasing, you won’t have the option to buy the asset outright at the end of the agreement.

Operating leasing

This tends to be used for specialist equipment, machinery, or equipment that’s only needed for a limited time. Due to its specialist nature, a business may have no interest in buying the item permanently.

This type of asset financing is usually cheaper than equipment leasing because a company only pays for the calculated value of the item over a limited lease time.

Asset refinancing

There are two forms of asset refinancing: the first is using a company’s fixed or current assets as security against a loan.

The second is where a business sells an asset to an asset finance provider. The finance provider then leases the bought asset back to the business which makes regular repayments to repay the loan with interest over an agreed period.

Vehicle asset financing

Also known as contract hire, this type of asset financing relates to vehicles only. A contract hire provider will usually source the vehicle(s) required and cover maintenance and servicing costs. As with other types of asset finance, your business agrees to pay a regular amount with interest over the agreed leasing period.

What types of assets can be financed?

Both current and fixed assets can be used for asset financing. Fixed asset financing suits longer-term asset refinancing or equipment and machinery leasings. Examples of this are:

• Business premises
• IT and office equipment
• Farm machinery
• Company cars

Alternatively, ‘current assets’ may be used as collateral for short-term asset loans or more flexible borrowing, for example, to cover expenses or pay a large invoice.

What are the pros and cons of asset finance?

Pros

• Supports business development and expansion
• Flexible and can be tailored to meet cash flow
• Fixed repayments helps business planning and budgeting
• Fixed interest rates support financial forecasting
• Good for equipment and machinery leasing
• Tax efficient

Cons

• Your business assets are at risk if you cannot meet the terms
• It's not as well suited to long-term borrowing e.g. 10 years plus
• Assets may decrease in value over time

How do I know which type of asset finance is best for my business?

Which asset finance is best for your business will entirely depend on your company’s circumstances. What’s right for one company might not be right for yours.

If you’re unsure what type of commercial asset finance is best for your business get in touch with a broker or specialist lender to talk through the needs of your business.

Are there any alternatives to asset finance?

There are some alternative avenues of credit to consider if you don’t want to go down the asset financing route.

• Unsecured business loan: This type of business lending isn’t secured against property or a commercial asset but may be subject to stricter affordability criteria. This could be a good option if you need a quick business loan without risking your business assets.
• Lines of credit: This offers a business the option of borrowing money up to an agreed credit limit. Interest is only paid on the balance owed, so it can be useful for solving cashflow issues. However, interest rates can be high.
• Merchant cash advance: This is a form of cash advance for businesses, that’s repaid automatically when a business takes a card payment from a customer. This tends to work well for businesses with bad credit, but interest rates may be high and repayment is dependent on trade.
• Invoice financing: This type of financing involves selling your unpaid invoices to an investor or broker who immediately gives the invoice's value to your business in exchange for a fee. It’s a flexible form of credit and a handy way to access money owed to you quickly.
• Government Start Up loans:  These are personal loans for new businesses that can’t get a traditional business loan. You can borrow between £500 and £25,000 to start or grow your business. There are stricter eligibility criteria but interest rates are low and come with free business mentoring.