How To Finance Business Growth – Part 3

You may need finance to grow your business – to purchase vehicles, move to better premises, launch an innovative product or enter a new market.

Use our blog series to understand your funding options and the advantages and disadvantages of each method.

Part 3: Asset Finance

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Asset Finance is a well-established, flexible method of financing the purchase or rental of assets such as machinery and vehicles.

It is available to new and existing businesses with any legal structure, and is also known as Machinery Finance, Equipment Finance, Hire Purchase, Operating Lease, Finance Lease, Refinance or Contract Hire.

The amount financed can be from £1,000 – £10M for 1-7 years, depending on the usable life of the asset.

Usually an asset finance provider buys the equipment and the business leases or rents it, making regular payments for an agreed term. The financier insures and maintains the asset over its lifespan.

The amount needed, security type and business track record will influence the term, conditions, interest rate, fees, and which Asset Finance provider can assist.

It is usually important the business demonstrates it can afford the regular payments.

 

Advantages of Asset Finance

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  • Quickly raise funds to get equipment, if you cannot afford to buy outright or want to spread cost over its lifespan
  • Reduce upfront costs of large capital purchases, meaning cash available for other purposes
  • Release cash for growth opportunities whilst retaining use of the asset via Sale & Leaseback
  • Often no additional security required except the asset being financed
  • The interest rate is sometimes  better than that of a business loan
  • Avoids depreciation – many assets such as vehicles, IT equipment and industrial machinery lose value and their security worth rapidly
  • No unexpected costs as the asset finance provider is often responsible for asset maintenance
  • Additional credit line to avoid extending an overdraft or loan
  • Sometimes a fixed rate is agreed to assist budgeting, or a tailored package to suit the business
  • Certain equipment, machinery and vehicles obtained through asset financing qualify for capital allowances, giving some tax relief against profits

 

Disadvantages of Asset Finance

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  • Lack of ownership as the financier retains the asset, although may agree buyout at term end
  • Can be more expensive than buying the asset outright
  • A deposit is often required
  • Not short-term finance, it is structured over at least 12 months and may be hard to cancel
  • Maintenance costs covered might exclude Accidental damage, so the business may pay for repairs
  • Some assets obtained through Asset Finance are not deductable for tax relief on profits

 

Types of Asset Finance

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Hire Purchase

The business leases an asset from an asset finance provider, who purchases the asset and owns, insures and maintains it throughout the leasing period.

The business pays a sizeable deposit then makes regular payments to use the asset, and ownership transfers to the business at the end of the leasing period for a small fee.

VAT is claimed back in the usual way.

Flexible payment plans such as a final “balloon” payment enable businesses to maximise cashflow through reduced monthly payments. This final large payment is based on the residual asset value at the end of the leasing period.

Finance Lease

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The asset finance provider purchases an asset which the business leases over a fixed period, making regular payments to use the asset.

A lower deposit is required than for Hire Purchase.

VAT is charged with each rental, and is reclaimed as payments are made.

The asset finance provider sells the asset at the end of the leasing period, the business and provider may share the proceeds.

 

The business owns the asset during the leasing period, and is responsible for insurance and maintenance, but does not keep ownership after that, although sometimes this can be arranged for an annual rental fee.

Operating Lease

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The asset finance provider purchases an asset which the business leases over a fixed period, making regular payments to use the asset.

It is useful if a business does not need the asset for all its working life, just to service a contract.

The rental costs are reduced as they are calculated on the asset value over the lease period, not on the full asset value.

The business owns the asset during the leasing period, and is responsible for insurance and maintenance, but does not retain ownership after that.

Contract Hire (Vehicle Asset Finance)

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Exclusively for vehicle leasing, the asset finance provider will source, provide and maintain the vehicles and dispose of them at the end of the leasing period.

The provider can use its network and volume discounts to obtain better prices than the individual business could.

Refinance

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The business sells assets to an asset finance provider who then leases them back to the business for regular payments plus interest.

Refinance enables businesses to quickly raise capital while still being able to use these assets.

It can be useful for cashflow and to allow businesses with adverse/no credit histories to raise funds, as the financier may use asset value not track record.

What Assets can be Financed?

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Physical assets with a high value can be financed if they are considered durable, identifiable, moveable and saleable.

Hard Assets include machinery, vehicles, manufacturing equipment and plant.

Hard Assets are reliable security for financers due to their ongoing value.

Some providers now offer finance on Soft Assets, that traditionally would not have been appropriate for asset finance.

Soft Assets are assets with little second-hand value at the end of the leasing period, such as software, office furniture, CCTV and EPOS systems.

Soft Assets are much riskier security, so asset finance providers need to know the business can afford repayments, and often require additional security such as a director’s guarantee or a cash deposit of up to 20% of the asset value.

 

For further information see

 

Consult an Adviser to check which Asset Finance option is best for your business situation and the tax implications.

 

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Published by

janbarwell

Business Blog Writer

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