What Is Asset Finance
Asset finance is often associated with the purchase of equipment (or things of a similar high cost) for a business. This type of finance is used by organisations who have the need or the opportunity to grow their business but perhaps may not have the funds readily to hand or prefer to spread the cost over a longer term.
In other cases, a business can use assets they own – such as plant, machinery or vehicles – as security against a loan from an asset finance provider.
Where a business requires the purchase of a new physical asset the finance company will pay for the equipment, plant, vehicle or machinery and the client will pay a regular sum to the provider.
The item may eventually become the property of the business over time, depending on the sort of asset finance involved.
TYPES OF ASSET FINANCE
This is a very similar model to hire purchase for individuals. The hire purchase provider retains ownership of the asset to be leased over the term of the agreement and leases it to the business for agreed regular fixed payments.
Businesses may make a larger initial payment followed by smaller payments on an agreed schedule. At the end of the agreed period, the business can choose to buy ownership of the item outright with a further payment.
This differs from some other asset finance in that the business is only ever renting the assets concerned. Again, payment is made with regular payments to an agreed schedule. This normally lasts until the finance provider has recouped the purchase value of the asset. In some instances, the finance company may allow the business to share in a percentage of the sale value of an item once it has been sold. The business does not have the option to purchase the asset outright.
Tax-wise, it may be possible for a business to offset the rental payments against their profits. However, this is not possible with long funding leases. The finance company retains the right to any capital allowances, but the business can reclaim VAT.
Equipment leasing is very similar to finance leasing, in that the provider buys the equipment required and the provider then rents this for a regular fixed fee over an agreed period. Once that period ends, the business can choose to extend the lease, upgrade the item, buy it at an agreed sum or simply return it to the provider.
Unlike hire purchase, maintenance and servicing costs for equipment leasing are down to the provider, meaning that the business doesn’t need to worry about this element. As an operating cost, equipment leasing can be offset against gross profit as usual.
Operating leasing is very similar to equipment leasing but tends to be used for specialist equipment or machinery that the business may not want to use for the full duration of the useful life of the asset or has no interest in buying permanently.
Operating leasing is basically renting an item over a short or medium term, with rental costs based on the length of time the asset is required. This type of financing is often cheaper than equipment leasing as the business only pays for the calculated value of the item over the limited lease time agreed.
There are basically two forms of asset refinancing: the first is simply using a company’s assets (physical or otherwise) as security against a loan.
The second – more properly called asset-based lending – is where a business sells an asset to asset finance provider for an agreed lump sum. The business then leases back the asset sold from the finance provider – thus repaying the lump sum paid.
Asset refinancing differs from a simple secured loan in that a business can use physical assets they may only partially own as collateral, but only up to the level of equity they have in that item.
Once the refinancing has been agreed, the business makes regular repayments over an agreed period to repay the loan with interest.
This form of asset financing relates to vehicles only. A business wishing to expand its fleet will approach a contract hire provider who will source the vehicle(s) required. The business pays a regular amount over the agreed leasing period.
Maintenance and servicing costs remain the responsibility of the provider, rather than the business. For larger companies with multiple vehicles fleet management services may also be included in the base contract hire costs.
Contract hire (also sometimes referred to as vehicle asset finance) carries the benefit of relieving a business of the time and budget-consuming tasks that accompany normal vehicle ownership. The provider is responsible for finding and buying a new vehicle, as well as all maintenance and servicing costs. At the end of the leasing period, the provider also assumes responsibility for the disposal of the vehicle.
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