August 11, 2022

Why Use Asset Finance?

It allows businesses to purchase high-value assets that are critical to the operation of a business. Businesses choose to use asset finance instead of waiting to save up and purchase these important assets upfront, this way they can obtain the assets faster and reserve capital in the business.

In this case, assets will typically refer to tangible items outside of land and property.

Such as:

  • Plant and machinery
  • Equipment
  • Vehicles (including coaches, buses, and lorries)
  • Intellectual Property
  • Furniture

How Does Asset Finance Work?

In most cases, businesses that are looking to scale or need to upgrade their assets might not have funds readily available, therefore an asset finance lender will purchase the asset from the supplier directly. In return, the business pays a monthly repayment to the lender. Depending on the type of asset finance facility, the business will own the asset at the end of the payment term or they will have the option to purchase the asset for a one-off fee.

What are Asset Classes?

It is important to understand the nature of the assets you are purchasing or refinancing.

There are two main categories: hard assets and soft assets. Some lenders will only lend against hard assets and other lenders may be able to lend against soft assets.

  • Hard Assets: Usually, these are high value assets and are required for business operations, typically with long lifespans that retain their value over many years. For example, vehicles, agricultural machines, large pieces of machinery and equipment such as engineering equipment. Overall they offer the lender a higher level of security due to the higher residual value. 
  • Soft Assets: Typically lower in value and have a limited residual value by the end of the repayment term. These assets might be computer hardware or software, audio visual equipment, office furniture and telecoms equipment. Generally hold a lower level of security to the lender.

What Are the Types of Asset Finance?

There are five main types of asset finance, each type has its advantages and disadvantages so it’s important to understand the basic principles of each before deciding which is best for the business.

  • Hire Purchase: When a finance provider pays for the asset on behalf of the business, and the business pays an agreed monthly repayment, plus interest to the lender. It is similar to making a purchase but paying in monthly instalments. With this type of finance, the business owns the item at the end of the repayment term. Typically the asset will show on the businesses balance sheet from the date of purchase, these facilities lend themselves better to hard assets, rather than soft assets.
  • Finance Lease: With a finance lease, the business is only able to lease the asset from the finance provider. The business still makes fixed monthly repayments for the term of the finance. The repayment term is typically set by the asset’s useful lifespan, which is determined by the lender. At the end of the repayment term, there are typically a few options provided by the finance provider.

    • Continue to pay the monthly lease payments (this is called a secondary rental period) 

    • Return the asset to the finance provider for resale and receive a share of the sale 

    • Sell the asset to a third party on behalf of the finance provider.

    The main difference between a finance lease and hire purchase, is that the business isn’t normally required to put an upfront payment down or pay the VAT upfront, the VAT is spread over the monthly payments/rentals. In addition, the assets don’t appear on the balance sheet, the cost of the finance lease is offset against the profits of the business.

  • Equipment lease: Similar to finance leasing. The business leases the asset from the finance provider with a fixed payment and repayment term. However, with equipment leasing the business has the option to extend the lease, upgrade the asset, or purchase the asset at the end of the term from the leasing provider. Additionally, the leasing provider is responsible for the maintenance of the equipment.
    Equipment leases can also be offset against the profits of the business, which provides potential tax advantages. Permitting businesses of all sizes access to investing in assets without tying up critical working capital.

  • Operating Lease: Similar to equipment and finance leases, however they are commonly used for leasing specialist assets that the business doesn’t want to own. The business still makes fixed monthly payments over the agreed term, where the term is typically shorter than the other types of leases. The main advantage with this type of lease is the business can regularly upgrade the asset, even during the agreed rental period.

  • Asset Refinance: Where the business sells their asset, or assets owned within the business, to a finance provider in exchange for an agreed lump sum. The business then leases the assets back from the finance provider, with a fixed payment and repayment term. This type of asset finances allows the business to release capital from the equity held within the assets owned by the business, the business can then invest this capital back into the business or use the capital to put a down payment on new asset and finance agreements. Depending on the finance provider the business is able to sell the assets at the end of the term or purchase the assets for an agreed sum.

Asset finance is available to a wide range of businesses in a variety of sectors, with the asset being used as the primary security to the finance provider. Asset finance lenders will usually specialise in certain sectors, asset classes, or types of asset finance. So it’s important to have a clear idea of all three before looking at lenders.

Provide can help you find the lender that’s right for your asset finance needs. With connections to over 200 lenders, we can help you narrow down the search and match you with the lender that suits your business criteria, so you can begin using the assets as soon as possible.

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