What is Asset Finance? A Simple Guide
There are many things to pay for as a business, from equipment to tools, vehicles to machinery. But what are you supposed to do if you don’t have the cash readily available?
Whether you want to secure lending against your existing assets to release cash or take out a loan to purchase new assets, this type of finance can help your business to operate efficiently so you can optimise your growth.
Want to know more? Not to worry — we’ve got you covered with this tell-all guide to asset finance.
What Types of Assets Can Be Financed By Businesses?
First things first, let’s break down what exactly “asset finance” can cover.
There are two broad categories of assets that can be financed by businesses: hard assets or soft assets.
Just like the name suggests, hard assets are physical, high-value items, such as:
- Plant equipment
- Engineering equipment
Unlike hard assets, soft assets have a limited lifespan. This means they may have a low value at the end of a finance agreement.
We’re talking about IT equipment, software packages, furniture, and electronics — to name a few!
Typically, lenders in the asset finance space will look to charge a higher interest rate for soft assets. This is due to the lack of security in the asset itself.
Who Is Asset Finance For?
Asset finance is for any type of business, including SMEs, that need to access high-value items to take their business to the next level. However, for one reason or another, they’re unable to buy them upfront.
Alternatively, perhaps the business can afford to buy these high-value items upfront but would prefer to spread the cost over a longer period.
Either way, the good news is that limited companies and partnerships, public limited companies and sole traders are all able to hop on the bandwagon.
The Benefits of Asset Finance
Now that we’ve covered what is asset finance and who it’s for, let’s address its various benefits:
- There are much smaller or zero upfront costs to purchase high-value items
- It allows you to spread the cost of an asset over its useful economic life
- You can structure asset finance packages with structured or seasonal payments to suit your cash flow
- Funding equipment via asset finance can be a tax-efficient way of investing
- You can expect a more flexible way of borrowing than you would get from other lending methods
Speaking of other lending methods, asset finance is a handy alternative to bank loans or overdrafts, which should be preserved to support working capital requirements for businesses.
What Are the Different Types of Asset Finance?
There are several types of asset finance available that are customizable according to the needs of a particular business. That said, we’ll list some of the usual suspects for you below.
- Hire Purchase (or Lease Purchase): This is when a finance provider hires the asset to a business for regular fixed payments with an option to buy ownership for a nominal sum at the end of the payment schedule.
- Finance Lease: This is very similar to hire purchase. The finance provider is essentially renting the asset to a business through a frequent payment schedule until its cost is complete. However, you cannot typically take ownership of the equipment at the end of the term like you can on hire purchase.
- Equipment Lease: This is a type of lease that allows a business to acquire softer assets such as technology, furniture, or catering equipment. Payments stagger across the useful economic life of the equipment with options to purchase or dispose of the equipment at the end of the agreement.
- Operating Lease: This is the same as equipment leasing. However, this type of lease is for specialist machinery or equipment that the business doesn’t intend to keep or buy permanently.
- Asset Refinancing: This is where a business either offers up an asset as security to release cash into the business or restructure existing borrowings.
If you’re new to this industry, it’s easy to start scratching your head when someone asks you the question: “what is asset finance?”.
(We’ve been there.)
Even so, this is a subject worth learning about. Especially for business owners who want to improve their cash flow by obtaining valuable items. To recap, it’s a short-term funding solution that delivers long-term gains in your quest for business success.
There are many lenders offering asset finance, but PMD stands out from the rest. We provide various funding solutions and excellent standards of service. Find out more about how we can help you today! If you want to keep up to date on our latest events and opportunities, follow us on LinkedIn.