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A Beginner’s Guide To Asset Finance For Business Owners

Posted in: General | Posted on: 30 November 2021

A Beginner’s Guide To Asset Finance For Business Owners

 

As a small business owner, you may turn to alternative finance to release cash into your business or facilitate the purchase of machinery, equipment, or vehicles through asset finance. To support the long-term development of your company and bolster the cycle of growth, you will require access to a steady stream of cash and resources. Asset finance is a vehicle used to support the purchase of assets without the burden of a sizeable upfront cost, as payments are spread over time.

Asset finance is used by all types of businesses, including SMEs to spread the cost of an asset, or release cash from the value of existing assets. There are many types of asset finance that range from hire purchase, leasing, and refinancing. We run through the definition of an asset finance loan, how this type of lending works and what asset finance can be used for.

 

What is asset finance?

Asset finance is a lending type used to fund the purchase of an asset, such as a company vehicle, equipment, or machinery. This type of finance can enable business owners to access essential resources and pay for them under flexible and affordable terms.

Asset finance can also be used to release cash from the value of assets that you own, also known as asset refinance. This can provide a gateway to affordable cash borrowing without delay as company assets will be used as security against the loan.

 

How does asset finance work?

If you take out asset finance in the form of a lease, the asset finance lender will own the asset and you will pay the lender to use the asset throughout the lease term. At the end of the lease, you will choose from a series of 3 options; to return the asset to the funder, continue to lease the asset for 1 months rental per annum (called peppercorn or secondary rental lease), or sell the asset to a third party for its fair market value and receive up to 99% of the sale proceeds.

Through a hire purchase agreement, you will pay monthly instalments until the asset is paid for, after which you will pay an Option to Purchase Fee to become the owner. Asset refinancing will enable you to borrow against the value of company assets.

Each asset finance solution works in different ways and is based on affordability, preferred payment style, tax/vat position and asset value.

 

What types of asset finance options are available?

There are many types of asset finance to suit different applications, such as purchasing an additional company vehicle to deliver orders due to a peak in consumer demand. You may decide to lease machinery to increase short-term stock volumes or borrow against the value of an existing asset to boost company cash flow and working capital.

Your intended end goal and how much your business can realistically afford will determine which asset finance option is suitable for your business.

 

Hire purchase – The hire purchase (HP) provider will own the asset and the borrower will make monthly payments throughout the agreement term. After the end of the agreement, the borrower will own the asset once a further payment is made, referred to as the Option to Purchase Fee. A deposit and all VAT will be paid upfront on a HP – if the business is VAT registered, all VAT can be reclaimed through a VAT return.

 

Finance leasing – The borrower will make payments to rent an asset owned by an asset finance provider until the purchase value is paid for. A finance lease is similar to hire purchase; however, a key difference is that the borrower will not be presented with the opportunity to buy the asset outright at the end of the agreement.

There are however 3 options – (i) continue to rent for 1 months rental per annum called a secondary/peppercorn rental, (ii) return the goods to the finance company, (iii) or sell to a third party for its fair market value and receive up to 95% of the sale proceeds.

The VAT on a Finance Lease is spread throughout the period of the lease and is paid on the lease rentals and like HP, can be reclaimed.

 

Operating leasing – This is a type of equipment lease where payments will only reflect the value of the asset throughout the duration of the lease agreement. This is a suitable solution for businesses that wish to use an asset for a short-term period.

An operating lease that relates to a commercial vehicle is also known as contract hire. The contact hire provider will own the vehicle and cover operating costs, such as servicing. The business will pay monthly instalments to use the vehicle over the short term, rather than make a financial commitment to buy the vehicle for its entire useful life.

Subject to your accountant’s approval, an operating lease could be classified as off-balance sheet which could also be beneficial.

 

Asset refinancing – To refinance an asset means to borrow against the value of an asset and therefore use it as loan security. Another type of asset refinancing, also known as asset-based lending, means to sell an asset to the lender to raise funds. The asset is then leased back to the business and paid for in instalments.

 

Asset finance is offered by a variety of lenders, including specialist asset finance providers, banks, and intermediaries, such as asset finance brokers and lender panels.

 

 

Keith Tully is a partner at Real Business Rescue, part of Begbies Traynor Group, the UK’s largest provider of company rescue, restructuring and turnaround services to businesses in financial distress, including Bounce Back Loan debt.

 

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