If you are running a business, then there may come a time that you will need to purchase assets for the business in order to continue to run the business or to grow.
Asset finance is a popular funding choice for UK businesses as a way of purchasing or leasing business assets without the need for a large upfront payment, aiding business cash flow and fueling business growth.
In this blog, we will look at the different types of asset finance, the benefits of asset finance solutions, the risks that may be associated with this, in comparison to other forms of financing options.
Asset financing (commonly known as asset finance) is a flexible finance agreement that can be used to fund the purchase of business assets such as new plant and machinery, IT equipment, cars, vans and other commercial vehicles.
Asset finance allows businesses to purchase or lease equipment or machinery without having to buy it upfront and eat into working capital or affect short term cash flow.
It allows the business to use the assets which are already on its balance sheet as collateral to fund the purchase or lease of the asset.
Asset finance providers will buy the asset for the business and then allow the business to pay it back in instalments or lease it off them for a fixed period of time, with an option to return or buy the asset outright at the end of the agreement.
As with any other type of finance product, you will need to pay interest and fees when utilising asset finance for your business.
With a finance lease, the finance provider will purchase the asset on your behalf and lease it back to your business.
Throughout the term, you will make monthly repayments to the finance provider, which will include the cost of the asset and the accrued interest.
This type of finance leasing provides several benefits as follows:
However, please note: You are responsible for insuring and maintenance costs of the asset. The total cost could be more than the market value of the asset. Some leases are short term requiring renegotiation of lease terms when the lease expires. You don’t own the asset during the lease term.
An operating lease is another form of asset finance offered by a finance company to businesses. It allows a business to secure an asset for a specific time but allows the leasee to upgrade the equipment to a more advanced or newer model during the lease period, subject to the terms of the agreement.
This asset finance product is often used for financing and leasing commercial vehicles and fleets.
Notes: You don’t own the asset until you have paid in full. You will be responsible for returning the asset in an acceptable condition. If purchasing a vehicle on contract hire, there is often a set mileage limit for the contract period. If you exceed this limit, you will pay excess mileage penalties which can be expensive. If you opt for lower monthly costs and a balloon payment, the overall costs of the finance term tend to be higher.
If you definitely want to own an asset at the end of the hire purchase agreement, then this is the option for your business.
Notes: You don’t own the asset until the end of the agreement. You will be responsible for the maintenance of the asset throughout the agreed period. If the asset is stolen or lost throughout the term of the agreement, your insurance may not cover the replacement value, therefore, consider gap insurance.
Asset based financing helps business to lease, loan or purchase ‘hard’ or ‘soft’ assets. The type of finance offered may depend on what you are wanting to acquire.
Hard items include physical assets like plant & machinery, vehicles and equipment that attract a high resale value.
Soft items may include items such as computer hardware or software, office furniture, telecoms, CCTV etc. These types of items lose their value after use and may be more difficult or impossible to resell.
Asset finance is an incredibly popular alternative to other finance options such as a business loan. Some of the benefits of asset finance are.
Asset finance does not require a big upfront payment, so it means there are small upfront costs, which help you spread the cost of assets over time, allowing you to release cash to use elsewhere in your business.
By utilising asset finance, your business will be able to access the newest and latest equipment more freely and straight away. This can help your business grow, improve efficiency, stay ahead of competitors or utilise cash reserves elsewhere, giving you a competitive advantage.
Asset finance allows you to spread the cost of business assets over longer time periods and depending on your budget. It also will allow you to budget more easily by offering fixed payment terms for your monthly instalments.
Depending on the type of asset finance, maintaining the asset may be covered by the finance company. Sometimes a finance company will replace an asset if the asset cannot be fixed. Therefore, you get worry free maintenance for the lease period along with and peace of mind.
Many businesses can get a prompt decision from asset finance providers. It could take less than 24 hours, if the agreement is less than £150,000.
The tax relief available when acquiring a business asset depends on whether you purchase them outright or lease them and the type and length of the lease. This also affects whether VAT will be charged upfront or throughout the term of the lease.
The cost of renting or leasing any asset is tax deductible as a business expense so this can reduce your overall business tax bill.
Capital allowances allow you to deduct a proportion of the cost from your taxable profits each year when you buy an asset.
You can claim capital allowances if the asset is:
You can seek professional advice from our tax experts at dns accountants to understand the tax benefits of the asset finance solutions you are considering.
If the finance provider owns the asset until the end of the finance term, you will not own the asset outright.
The finance provider may also place usage limits on the asset during the term and you can easily incur high penalties for going over these usage limits. An example of this is annual mileage limits on leased commercial or fleet vehicles.
With some asset finance, the terms of the agreement can be longer term (often between 12-84 months). Whilst this helps to spread the cost, it is a long term commitment for your business and one that you should not underestimate and budget for.
As with any other finance solution, the consequences of defaulting on an asset finance agreement can impact your business hugely. It can affect your credit rating and stand in the way of accessing other forms of finance in the future.
Even though you don’t own the asset, you will be responsible for any damage caused to the asset, beyond what may be agreed.
If an asset is damaged or stolen during the finance term, your insurers may not cover the full cost of replacement. You should consider taking out ’gap insurance’ for things like vehicles etc.
Many people get confused between ’asset refinancing’ and ’asset finance’.
Asset refinancing helps to release funds and unlock the cash value of an asset that the business owns already. The lender buys the existing assets from you and then finances it back to you under a hire purchase or lease agreement.
Asset finance on the other hand, allows you to purchase or lease an additional asset for your business.
Asset finance is available to all businesses from start-up, sole traders, partnerships, limited companies to PLCs.
Depending on your credit rating and if your business is viable and able to meets its financial commitments, then asset financing could be for your company.
With such a wide range of types of asset finance solutions and a variety of providers, it is worth seeking advice before deciding on the right finance provider and solution for your business.
Look for funders that are experts in the type of asset you are looking to purchase.
Purchasing physical assets and updating plant, machinery or equipment for your business can be extremely expensive. Asset financing can help businesses acquire assets quickly and spread the cost to aid cash flow.
If you’re seeking asset finance and your company meets the eligibility criteria, we can assist you throughout the application process and liaise with lenders on your behalf.
We can also try to achieve this via the Growth Guarantee Scheme. You can read more about the scheme here.
Not all lenders within the scheme provide every type of finance available, so we recommend reaching out to us. We can help you determine the most suitable type, amount, and lender for your needs.
The lender will conduct a full credit check, and we will help provide the necessary evidence to demonstrate that your business can afford to repay the finance offered. The information a lender usually requires includes:
As with other financial products, lenders will assess your application. We can leverage our network of lenders to submit your application to all suitable parties. From there, we will select the best offer for your business.
Feel free to contact us at 03300 886 686 or email us at contact@dnscorporateadvisory.co.uk with the subject "Asset Finance” if you have any questions or would like to schedule a free consultation with our advisory team.
Any questions? Schedule a call with one of our experts.
Aman Bhardwaj Aman Bhardwaj is the Head of dns Corporate Advisory, where he specialises in mergers and acquisitions. With over 30 successful acquisitions under his leadership, Aman has played a pivotal role in expanding dns's footprint in the accounting industry. He brings a robust academic background with a master’s degree in Economics from the University of Warwick and a bachelor’s degree in Computer Science.
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