On this page:
|Short-Term Asset Finance|
|Who Can Get Asset Finance?|
|- Capital Lease||What Can I Borrow?|
|- Equipment Leasing||Quick Asset Finance Facts|
|- Operating Leasing||Conclusion|
Intro to Asset Financing
A business needs to grow if it is to remain profitable. Business growth depends on the kind of investments you make. To effectively handle competition, attract more customers, and improve operational efficiency, your business needs to change from its current status and improve its internal environment. Such changes cost money, which is not always readily available. Asset finance presents a beneficial solution that can help you accelerate growth.
There are so many different finance options available to small business owners, making it difficult to choose one suitable. Choosing the right way to get hold of the assets you need to grow your business and get ahead of your competitors can be easier said than done.
This post aims to dispel some myths and confusion around asset finance, defining what it is and why it is a more viable option for your business than traditional funding methods such as a business loan.
"No matter the industry it operates in, every small business has to have assets to function."
What is an Asset?
An asset is anything a business owns that it doesn't use for sale or immediate use, intended to have some value for the future. An asset can be as big as land, property, or heavy machinery and as small as a desk, chair, or filing cabinet. The type of assets required by a business depends on its particular industry and the specific needs of its operations.
Some companies may, for example, need more technical equipment like computers, printers and office equipment. In contrast, others may need to invest more heavily in catering-related assets such as refrigerators and ovens.
However, one thing that remains constant is the need to lean on a lender at some point to gain access to high-quality assets. You don't want your business to scrape by but be punching above your bank balance's weight. The large majority of UK business owners work closely with a trusted lender from year to year to continuously improve their business offerings.
Love Finance can fund any asset that you require.
"Assets tend to be used to produce value rather than directly."
What is Asset Finance?
Asset finance is a way for a business to access cash to fund its growth objectives. Asset financing involves using company assets as security when approaching financial institutions to borrow funds. While a business may not have the funds necessary to acquire more assets for its growth, other assets could facilitate the new assets acquisition process. Businesses can purchase the assets they need quickly and easily, using easy-to-manage monthly payments rather than upfront lump sums.
One prominent feature of asset-based finance is how it eases the burden of acquiring essential assets in your business' growth plans. It frees up the capital necessary for the purchase and leaves the company paying smaller regular instalments. In addition, asset finance also provides flexibility that other funding options typically do not. It allows your business to easily change or adjust its borrowing terms to keep pace with changing needs and priorities.
If you want to expand your business operations and gain a competitive edge in the marketplace, asset finance includes many excellent options.
"Pay back what you can afford for the asset over a sustained period."
Types of Assets
A hard asset, also known as a tangible asset, is any physical asset that has value, such as real estate, precious metals, or securities. These assets differ from other types of assets, such as financial assets or intellectual property, in that they can be directly converted into cash if needed. Unlike stocks or bonds, for example, which may fluctuate in price based on market conditions and other factors, physical assets can always be relied upon to provide stability and security to investors. Additionally, many experts argue that holding a diversified portfolio of hard assets is one of the safest and most reliable ways to protect and grow wealth over the long term.
Whether you are an investor looking to secure your financial future or simply someone who wants to safeguard their valuable possessions, hard assets can play a crucial role in helping you achieve those goals.
"A hard asset is anything tangible such as a vehicle."
A soft asset is an intangible item with value but cannot be physically touched. Common soft assets examples include copyrights, patents, and trademarks. While soft assets don't have a physical presence, they can still be valuable to a company. For example, a copyright can give a business the exclusive right to produce and sell a particular product. A patent can provide a business the exclusive right to use a specific invention. A trademark can help a business develop and maintain a strong brand identity. While soft assets may not be physical, they can still provide significant value to a company.
Many asset finance arrangements will allow you to finance either of these types of assets.
"A soft asset is something non-physical such as software."
How Does Asset Finance Work?
To understand how asset finance works, we need to look at the type of asset finance agreements available. These types of asset finance follow the same concept, only that each executes it with some variation.
A hire purchase agreement is one of the most common types of asset-based lending used today. With these types of asset finance, you buy the asset, but you don't pay for it all at once. Instead, you may pay monthly for the business assets, giving you instant access to a piece of equipment you may or may not have otherwise been able to afford. A business can approach an asset owner and agree to pay the asset's price over a given period. These agreements last anywhere from one to six years.
The asset finance provider retains ownership of the asset during that period, but the business uses it in its operations. As soon as you have made the payments, the asset's ownership rests with you. The lender will also likely expect you to pay a deposit before the instalments begin, and the responsibility for insurance costs and maintenance of the asset lies solely with you.
"Hire purchase allows you to own the asset at the end of the agreement."
Once the payments are complete, the asset owner transfers ownership to the business. The business enjoys improvements in its performance due to utilising the assets. Furthermore, the business enjoys favourable payment terms. The asset owner can retain ownership if the business defaults on its payments.
An example is when a well-performing parcel delivery business wishes to expand its services to new routes. Since buying a new fleet of delivery vans is necessary but expensive, a hire purchase presents the perfect solution. A vehicle dealer can provide the fleet of vans and receive their payment in instalments. Similarly, the delivery business expands its operations, realising significantly larger profits and honouring its instalment payment commitments.
Contract hire is a type of asset finance that allows businesses to lease vehicles for an agreed period, usually two to four years. At the end of the contract, the vehicle is returned to the finance company, and the business has no further obligations. Contract hire can be a flexible and cost-effective way of funding a fleet of vehicles. This is a popular form of vehicle asset finance as it allows you to spread the cost and avoid upfront costs.
"Contract hire is a popular form of vehicle finance, you can use the vehicle while avoiding hefty upfront costs."
Capital lease works the same way as hire purchase. However, the business does not have the option to keep the asset at the end of the repayment period. Instead, the company may receive a percentage of the price accrued after the asset's sale.
Equipment leasing is where an asset owner sets up an equipment leasing business. Businesses can lease the equipment for a certain period, with the option to extend the period once it expires. Some equipment leasing services also present the opportunity to sell the asset at the end of that period. This leasing service allows a business to utilise the equipment without the risk of ownership.
Equipment leasing is a good option if you don't wish to purchase the asset outright. It is one of the most sought-after types of finance agreement because leasing equipment gives you immense flexibility. At the end of the contract, you have two options. You can pay a small fee to purchase the same piece of equipment outright or upgrade to a newer part of the equipment.
With technology moving as fast as it does and equipment becoming outdated more quickly than ever, leasing gives you the competitive advantage to constantly stay ahead of your competitors.
"Equipment leasing allows you to profit from the asset without owning it."
Outside of the business world, this is the same reason many people have turned to car leasing rather than car ownership: at the end of a 5-year agreement, rather than owning a 5-year-old car outright, which is depreciating, you trade the vehicle in for a newer model at a similar rate. The same is true of leasing in the business world. With a leasing finance agreement, you pay monthly instalments during the period you use the asset.
Operating leases share features of equipment leasing, only the business has no intention of buying the asset after the lease period. Such leasing is usually for specialist equipment in a given project or phase of the business's growth journey. Its specialist nature makes the equipment redundant once you have accomplished the project objective.
A finance lease is a type of asset finance that can purchase a wide range of equipment and machinery. The key feature of a finance lease is that the lessee (the person who takes out the lease) has the option to purchase the asset at the end of the leasing period. This means that, unlike with an operating lease, the asset becomes the lessee's property at the end of the term. There are several benefits to taking out a finance lease, including that it can spread the cost of an asset over its life and allow businesses to preserve working capital.
"Leasing is a great way to benefit from assets with less commitment."
Asset refinance is a way of unlocking the equity in an asset to meet current financial obligations. It is almost similar to using an asset as security for a loan. However, an asset finance loan transfers ownership of the asset to the lender. A lender purchases your equipment and then leases it over an agreed period. This applies to existing assets and those you have capital tied up in.
"You can refinance an existing asset or a new one."
Asset refinancing is helpful for a business that may have plans to expand operations in one department. Since it lacks the funds but has under-utilised assets in another department, it can access the equity of those assets to realise the expansion plans. You can use asset refinancing even on the company's assets you are still paying for and those you own and have capital tied up in.
Make sure you keep an eye on the rental costs of the assets involved.
Asset Finance vs Business Loans: Why Choose Asset Finance?
Most business owners go down the asset finance route for one simple reason: cost.
Most of the time, asset finance is cheaper than a business loan. This is because the loan's security is attached to the asset itself rather than you personally. In other words, if you can't afford to pay off the asset before the agreement is up (or at the end of the contract), the lender may seize the asset. If this were to happen, there would be less risk involved (for both you and the lender) than lending against personal assets such as your home. The rate from asset finance lenders will reflect this more negligible risk, making it more affordable than a business loan.
"Asset finance tends to be cheaper than a business loan so is therefore a better option."
Is Asset Finance Regulated?
While asset finance is undoubtedly a valuable resource for many businesses, it is essential to note that this type of financing is not regulated in the same way as other forms of lending. This means that asset finance providers are not subject to the same standards and requirements concerning customer protection and fair lending practices as banks and other financial institutions. As a result, it is crucial for businesses considering asset finance options to conduct careful research to choose a provider that aligns with their needs and goals.
Advantages of Asset Finance
Improves or restores cash flow
Asset finance allows you to access much-needed cash in your business through what you own. Having assets without cash flow makes doing business hard. But, with asset finance, you can access some of the equity in those assets to help push your business to the next level. Approaching a financial institution such as a bank for a loan usually comes with less favourable terms than asset-based financing.
"Use asset finance to keep cash in your business."
Helps preserve your working capital
Many businesses use asset finance to free up working capital, which can then be used to invest in other critical business areas. This allows you to preserve your working capital for expenditures that will help drive growth, such as marketing or hiring new employees.
In addition, asset finance can be a good option for startups and small businesses looking to expand but don't have the funds immediately available.
There are many options for how you can do asset financing. Your business owns a diverse set of assets that you can apply in any discussed method. Each method suits different needs and circumstances. No other financing option presents your business with as many answers to varying financial challenges.
Financing your assets allows you to spread the cost into affordable monthly repayments.
"Asset financing affords your business flexibility and simplicity of execution."
Lenders specialising in asset finance understand what is needed and have protocols to speed up the process. Since there is security in the asset, lenders confidently accelerate the process, allowing you fast access to funds.
Asset finance can cover almost anything that a business might want to acquire as an asset. The asset doesn’t necessarily have to be new, it could be used. It also doesn’t need to be physical, it could be something like software. The finance provider just needs to see that the asset will help the business to generate income.
The fast approval and processing time in asset financing allows your business to improve its operations rapidly. For example, since the delivery service expanded its fleet of vans, it will cover more ground quickly in the new routes. Its competitors are unlikely to keep up with its speed of expanding business operations.
"Asset finance allows you to one-up your competitors."
Capital allowance tax benefits
Investing in business assets affords you financial relief when paying corporation tax. Therefore, all sums in asset financing will be treated as the annual investment allowance, thus lowering the amount of tax you will pay.
"Asset finance is a good option as you avoid the risk you might face if you had purchased."
Minimise purchase risk
Since you can lease equipment through asset financing, you don't need to bear the risks of ownership. While such equipment has value, it also presents certain risks and expenses. Purchasing comes with a lot more commitment than leasing. Leasing allows you to stay up-to-date and ensures that you are not wasting any purchases. For example, you must store specialised equipment in the right conditions lest their quality and usability deteriorate. Similarly, there is a risk of theft, damage, or obsolesce. Hiring such equipment makes business sense, especially if you need them for limited periods.
Short Term Asset Finance
Short-term asset finance can be a great way to get your business the equipment it needs without breaking the bank. It essentially works like a loan, allowing you to spread the asset's cost over time. This can be particularly helpful if you have a large one-off purchase, such as a new piece of machinery.
Perhaps the most significant advantage of short or medium-term asset finance is that it can help you preserve your working capital. This is because you only need to pay for the asset as you use it rather than funding the entire cost upfront. It can be an excellent way to manage your cash flow and keep your business running smoothly. If you're thinking of taking out a short-term loan agreement, shop around and compare different providers to get the best deal.
"Short-term loans can help preserve your working capital."
Who Can Get Asset Finance?
Asset finance companies typically require that businesses have a good credit score and solid financial history. Asset finance options may be available to both new and established businesses, depending on the financed product or service. In some cases, you may need to own your business outright to qualify for asset finance. It is also important to check whether there are any specific conditions.
At Love Finance, we specialise in offering finance to small businesses in the United Kingdom. We understand that each business is different and has varying needs. We provide fast, simple, and straightforward solutions for any business size.
The asset finance industry sometimes favours limited companies over sole traders, but at Love Finance, we always do our best to get funding for sole traders.
To be eligible for our products, you must:
Be a UK-based business with at least three months trading history
We can currently only offer finance to UK firms.
Have a good credit rating
It's not the end of the world if you have a bad credit rating, but it makes it easier to get funding if it is good. You should take any steps you can to improve your business credit, such as making regular payments and ensuring they are on time. Making regular payments shows the lender that you are reliable and won't pose a risk for them.
"Having a good credit rating is beneficial when applying for finance."
What Can I Borrow?
You can borrow money for assets at any time; it doesn't have to mean that your business is struggling. Lenders will typically have minimum and maximum amounts you can borrow depending on the assets concerned. There will typically be fixed payments and fixed interest rates, but this will depend on what you borrow and the lender you use. Limited companies may be able to access more high-value items.
Quick Asset Finance Facts
- - Asset finance is a fast way to lease or purchase new or use existing ones to unlock cash.
- - You can use a hire purchase or an operating lease to get new assets for your business. Both involve instalment payments; however, hire purchase allows you to gain ownership of these assets at the agreement's end while an operating lease does not
- - Asset refinancing allows you to use existing equipment by selling to a lender, who then leases it back to you
- - Asset financing is a small business loan alternative. This allows you to get and use the equipment you need without paying the cost in total upfront
- - Apply for asset finance here, or contact us for more information
"Asset finance allows your business to grow in unexpected ways."
Your business could take time to make enough funds to undertake its growth and development plans. However, time and opportunity never wait for such preparations. Luckily, asset finance is a good option for executing such projects.
A finance company like Love Finance always works in your best interests to find asset finance that suits your company.