Have you got a query about business asset finance? Then give this article a good read through. Here’s pretty much everything you need to know concerning asset finance for businesses, explained simply by the professional team at LUV Asset Finance – and if you want to know anything more or how these services can apply to your business, then don’t hesitate to contact us… we’re with you all the way.

Definition of Asset Finance

Asset finance is a form of lending used by a business to acquire both hard and soft assets such as equipment, machinery, vehicles, training expenses, office fittings and software ct.. It effectively spreads the cost of acquiring these assets over an agreed period of time. 

How Asset Finance works

After the customer has selected the asset they wish to purchase, a commercial agreement is made between the business and the finance company. The finance company then purchases the asset and the customer has use over it during the agreed period of time with a series of set payment instalments in place. Depending on the type and details of the agreement, at the end of the payment schedule, the asset can be either owned outright by the customer or return to the financing company. 

Why use Asset Finance?

The main reason for using asset finance is to better manage your cash flow when aiming to grow your business through asset purchasing as opposed to acquiring assets through ‘cash upfront’ expense.

Profit gained by your business whilst using the asset may offset the monthly cost! It can also enable businesses to release cash from the value in assets they already own.

This also leaves your cash reserves untouched and available for other areas of your business, enabling you to plan ahead financially.

What businesses use Asset Finance?

All types of businesses in any industry can use asset finance including sole traders, limited companies, public limited companies and limited partnerships. 

What is an Asset Finance Broker?

An asset finance broker provides guidance and advice to the customer as they try to provide the most appropriate and cost-effective method of funding asset purchasing. 

They’re the middle man connecting the customer and the funding sources, ensuring that the customer gets the best possible deal with as little hassle as possible. 

How to get financing for a business

Firstly, you’ll need to decide on what the asset is you want to acquire. You’ll also need to get a rough value of the asset in the form of a quote from a supplier. 

Once you have this information, you’ll then need to approach a broker. While, traditionally, most businesses believe the best practice when acquiring finance is to approach their principal bank, going straight to a broker allows you to compare quotes from multiple funders.

You’ll also be rest assured that your broker will work more closely with you than a bank to ensure you get the best type of funding and most affordable deal. 

Leasing

What is a Lease?

Business leasing is a form of leasing in which a finance company is the legal owner of an asset for the duration of the lease, however, the lesse (customer) has overall operational control of the asset and a substantial share of the economic risks from a change in the value of the underlying asset.

Why Lease?

By leasing, businesses have much more affordable and ready access to equipment as and when they need it, essentially keeping ahead of their competitors in both maintenance value and potential business growth. Leasing also allows businesses to forecast and plan ahead, having a positive effect on cash flow.

Businesses can retain their capital and invest in other areas of their business while spreading the cost of new, up to date, essential assets. 

Additionally, leasing provides an emergency safety net if assets critical to a business need replacing. 

LEASING EXAMPLE: A restaurant chef’s oven breaks down on a weekend of high bookings, so they must replace it quickly – leasing asset finance would allow the chef to be back up and running servicing their customers as quickly as possible without a large outright payment.

What are Sale and Leaseback?

To gain cash, businesses can sell an asset they own to a funder. The funder can then lease this asset back to the business over an agreed term as is typical with a leasing deal. 

This finance tactic is a simple and cost-effective solution for cash poor, asset rich businesses as they can unlock capital tied up in existing assets by selling, but effectively-remaining the sole user. 

This frees up cash for other areas of your business, and the deal can be set up quickly as the asset itself acts as the security.

What is an Operating Lease?

This form of the lease allows businesses to use the equipment whilst the lender takes the burden of the ownership risk in its resale value.

Can second-hand equipment be financed?

Yes, second hand or refurbished equipment can be financed by businesses. It’s important with financing second-hand equipment that you work with a trusted and experienced broker as different lenders have different terms for their agreements. 

Hard vs Soft Assets

What is a Hard Asset?

A Hard Asset is defined as a tangible item that has a resale value at the end of the agreed term. Examples of Hard Asset would include vehicles, machinery, plant, and manufacturing equipment.

What is Hard Asset Finance?

In a hard asset finance agreement, the lender pays for the asset in full so that the customer can spread the cost of repayments over up to ten years depending on the asset and its value. The exact terms of the agreement depend on the type of funding.

What is Soft Asset?

Soft Assets are often intangible and have little or no resale value. Good examples of Soft assets include items such as software, paint, office chairs, fixtures and fittings for projects such as refurbishments.

What is Soft Asset Finance?

In a Soft Asset Finance agreement, the bank or funder purchases the items required by the customer who then pays the bank or funder in fixed instalments over an agreed term, however, no tangible asset acts as the security.

Other types of Asset Finance

What is Hire Purchase?

Hire Purchase is an agreement to hire with the option to purchase at the end of the agreement. Cost of purchase is spread over time by paying in instalments. The item appears on your company balance sheet and you are immediately responsible for maintenance and insurance costs. At the end of the purchase agreement, your business owns the asset.

What is Vehicle Contract Hire?

Contract Hire is a popular finance method for business vehicles as businesses can enjoy full use of the asset over the hire agreement without the responsibility of ownership. Simply return the asset at the end of the agreement.

What is an Unsecured Business Loan?

An Unsecured Business Loan agreement doesn’t require Assets because they are based on the creditworthiness of the business and are repaid in fixed monthly payments over 6 months to 5 years. Most banks prefer secure loans where an Asset itself can act as security. This is a quick and simple service with decisions typically made within 24 hours of application.