Asset Finance

Asset Finance

Asset finance is a form of financing that allows you to get your hands on business assets like equipment, machinery, and vehicles without having to pay for them up front. It can also help you get cash out of the value of your current assets or use your assets as collateral for a business loan from an asset financing lender.

Businesses who want to bring their growth plans into motion but don’t have the cash on hand, or business owners who would rather spread big expenses over a longer period, would find business asset financing appealing.
Short-term asset funding also helps companies stay competitive by promoting access to cutting-edge technology. Asset finance is a broad term that refers to the financing of valuable assets in your business.

Asset finance can be divided into two categories: lending backed by existing assets and equipment financing to acquire new assets. The borrower will ultimately take full ownership of the asset, return it to the lender, or lease a newer version, depending on the form of asset financing used.

Asset funding entails:

  • Leasing of equipment
  • Purchase of a rental
  • Leasing financing
  • Leases for the purpose of operation
  • Refinancing reserves

An ‘asset’ can be almost anything, whether it’s a catering company’s ovens and refrigeration or a haulage company’s fleet of vehicles — and with a wide variety of alternative lenders to choose from, asset financing for almost anything is feasible.

The operation of asset finance

Depending on which form of asset finance you select, asset finance operates in a few different ways. Hire purchase helps you to spread the cost of an asset over a fixed period of time. The asset is yours to hold once you’ve paid the lender in full.

In contrast, equipment leasing involves the landlord purchasing the asset and you paying a monthly fee to rent it. You have the option to extend the loan, pay the remaining balance to buy it, upgrade to a new model, or return the asset to the lender at the end of the negotiated period.

Asset refinancing helps you to pump capital into your company while holding your current assets. When structuring a contract, you can also use it to consolidate debt or provide security. Lenders can usually lend up to 80% of the value of your asset, depending on your situation.

An example of asset financing

Here’s a real-world example of asset financing.
Assume you’re the owner of a manufacturing business that has to purchase more equipment due to increased demand. You need the equipment right away to satisfy this new demand, but it will cost thousands of pounds, which your company cannot afford to pay upfront.

You decide to go for the hire buy option after doing some study. You don’t have to provide security because the asset serves as the loan collateral, which is another advantage.

You and the lender agree that the lender will buy the machinery and you will lease it from them for 64 months. You obtain the asset you need to raise your company’s production capacity a few days after the loan is finalized.

You buy the equipment outright at the end of the contract for a nominal fee.

What is the purpose of asset finance?

Asset financing is ideal for all forms of companies, including small and medium-sized enterprises. It’s intended for those who want to get a high-value item to help their company expand while spreading the expense over the item’s useful life. Limited companies and associations, sole traders, and public limited companies are also responsible for asset financing.

What is the period of asset finance?

Asset financing is normally available for one to seven years, or even longer in some situations (usually for very expensive assets). For the agreed-upon term, the asset finance firm recoups the asset’s purchase price, plus interest.
The amount of time the loan is provided for is often calculated by how long the asset will be “usable” and how soon the lender wants the money back. You must demonstrate that you can afford to make the agreed-upon payments as a business borrower.

Asset financing is used to purchase new assets and facilities.

Paying cash for brand new equipment or machinery can be costly, and it can also be a risky step that can lead to cash flow issues. And some businesses actually lack the requisite working capital to make a major purchase; this is where equipment financing comes in.

Refinancing of properties

The process of obtaining a loan against valuable assets owned by your company, such as houses, cars, or equipment, is known as asset refinancing. It’s a basic concept: if you don’t pay the debt, the lender takes your asset to recoup what you owe.

The amount you can borrow is determined by the value of the assets involved since you are essentially ‘unlocking’ cash. Debt restructuring is often done through asset-backed lending.

What is asset-based funding, and how does it work?

Some lenders specialize in a specific type of asset refinance, while others can fund almost anything with a resale value. Asset financing is available in a variety of forms, and it can be a very versatile structure. However, there are some limitations: the asset must be essential to the activities and must be movable so that it can be used as collateral for the loan.

Benefits of Asset Funding
1. Lower initial costs
Asset financing is a method of lowering the upfront costs of buying an asset. Until leasing the asset to the company, the finance provider purchases it.

2. There would be no deprecation
Industrial machinery and IT equipment, for example, will depreciate over time, lowering the asset’s value. Since the company does not bear the brunt of the asset’s decline of value, asset financing eliminates the risks associated with depreciation.

3. Improved cash flow
You can use surplus capital for other growth purposes or put it aside for protection while gaining access to the equipment your company needs to compete and progress to the next level by spreading the cost of the asset over time.

4. Cost savings
Since the asset lender always takes care of the asset’s management and servicing, you’re spared the costs of ensuring the asset is in good working order.

5. No or minimal additional protection is needed.
In the vast majority of situations, the asset is considered adequate collateral for the loan. A deposit can be requested on occasion. Those who are unable to obtain conventional forms of business financing can benefit from asset finance.

6. A boost in cash flow
In most situations, you’ll be asked to make monthly fixed payments for the duration of the contract. Your cash flow and working capital can improve as a result of spreading the cost. To make repayments more stable, fixed interest rates may be settled upon.

What is the role of an asset finance broker?

An asset finance broker assists their business clients in obtaining asset financing by connecting them with a lender who can meet their funding needs.
Is asset finance subject to regulation?

Financial services companies are governed by the Financial Conduct Authority (FCA), which includes car rental transactions. The FCA does not control general business asset financing.

Many asset finance lenders, on the other hand, are FCA-authorized and controlled, and they are likely to have adopted the same processes and practises throughout their entire enterprise.