Comparing Asset-backed Finances
Business owners should think carefully when looking at the options available to them when financing their businesses. This includes the purchase of new equipment needed to expand the business or the simple replacement of old machinery that is no longer efficient.
What is Asset Finance?
Asset Finance is the use of credit or leasing facilities to fund the purchase of assets for a business. Assets normally suitable for funding are:
· Plant & machinery
· Agricultural equipment
· Construction equipment
· Marine and aviation
· Green technologies
· Cars, HGV’s & commercial vehicles
· Buses & coaches
Types of Asset Finance
This is similar to Hire Purchase but the customer hires the equipment over a predetermined period which means they have the benefits of using the asset without the responsibility for disposal at the end of the agreement. Unlike Hire Purchase the VAT is paid on the rental payments rather than in a lump sum which assists with cash flow.
Hire Purchase / Lease Purchase
This is the most popular and simple facility and the business own the asset at the end of the agreement. Typical terms are between 12 and 60 months and a deposit plus the VAT is payable up front.
Refinance of Assets
A business can refinance owned assets to release capital to purchase new assets or support cash flow. These facilities are typically classed as a ‘sale and HP back’ and work in the same way as a Hire Purchase facility with repayments being made over a fixed period.
Businesses can fix their monthly costs when it comes to running a car or van fleet. Contract Hire offers this benefit as everything except fuel and insurance costs is included during the period of hire.
What are the benefits of Asset Finance when compared to Bank borrowing?
Bank borrowing to finance assets takes up some of the credit available from your bank and will have an impact on the ability to extend an overdraft facility. In addition, by funding assets using a bank loan additional security such as a charge over freehold property may be required and the facility may be repayable on demand. The key benefit of an asset finance facility is that it is ‘stand alone’ and is linked directly to the asset purchase and is not repayable on demand.
What Lenders look for when considering an asset finance requirement?
Lenders will always look at the ‘affordability’ and the ‘security’ of the asset over time, simply put, can the business repay the loan and what is the used value of the asset over time.