In the past few years the term ‘alternative finance’ has notably evolved from its fringe status outside the mainstream to become one of the catchwords for recovery and growth. A key family of products within the alternative finance is ‘asset finance’.
Many SMEs seek investment to flourish and expand. Investment often includes assistance to acquire working assets within a replacement cycle or to underpin growth in sales and production, while identifying strategies to reduce debt-burden and optimise the cash in your business. This is where asset finance offers a beneficial alternative to traditional bank borrowing which often ties up core property security, or when suitable security is not available.
What is Asset Finance?
Asset finance is a type of term-funding used by businesses to obtain the equipment needed to grow. Whether you choose a rental or purchase finance product, you should be given the option to spread your repayments over the ‘useful working life’ of the asset, thus avoiding the full cost of buying outright.
Types of Asset Finance include (but are not limited to):
Hire purchase allows your business to buy equipment on credit, with the finance company purchasing the asset on behalf of your business. The finance company holds ‘title’ to the asset for security until you have repaid the outstanding debt, at which point you are given the option to acquire title to the asset for a nominal sum.
Leasing gives your business access to new assets by way of renting it for a contracted period without owning the asset. The leasing company (the Lessor) buys and owns the equipment on behalf of your business (the Lessee), and the rentals attract VAT which the Lessee can claim back.
Why Use Asset Finance?
If you’re looking to retain cash in your business, commercial asset finance products can help. They’re designed to support investment in, and expansion of your business. Asset finance can be used to fund any asset, from office equipment such as photocopiers to industrial equipment such as forklift trucks. It provides an ideal opportunity for many businesses by offering the means of new equipment that might otherwise be unaffordable.
These facilities tend to rely on specific security within the asset, thus maintaining ‘headroom’ for core bank borrowing, and other ‘unsecured’ facilities which may otherwise be unnecessarily exhausted on capital assets.
Benefits of Using Asset Finance
- By structuring your finance repayments against the income your asset acquisitions can generate within your business, your key working assets can become self-funding
- Hire purchase enables assets to be acquired immediately by paying a mutually agreed deposit or initial rental, and spreading the balance of the cost over a pre-agreed period
- Products offer a choice of ‘ownership’ or ‘hire’ depending on the need to own the asset at the end of the finance agreement, preferred treatment of the VAT, and subject to the advice of the company accountant
- Repayments can be priced and structured at the outset for ease of budgeting, and to reflect cash-flow
- As the finance is secured against the asset, there is usually no need for additional security
- Asset finance facilities which are independent of your bank, do not impact on the overall credit available from your bank
- Asset finance and other structured repayment products which are promptly repaid help to enhance a business’s credit history, making it more attractive to banks and other lenders
What’s Next for Asset Finance and SMEs?
The greatest challenge regarding asset finance is that many SMEs are unfamiliar with the variety of products and services that are available. By understanding what these different products can achieve, and how they can influence growth within your company, you can help realise your core business objectives.