Asset Finance gives your business access to asset-based needs to move forward without depleting cash reserves better invested elsewhere.
It is a broad term that refers to a range of solutions. Generally, its primary purposes are to help a business get additional assets. Secondly, release a secured-loan against a business’s existing assets.
Asset finance without cash release
Normally, businesses are facing difficult decision on whether to buy an item to upgrade performance. This involves gauging the long-term benefits of making the purchase versus paying for the upfront cost that affects cash flow. Decision-making often ends with delaying that needed purchase and passing up on an opportunity.
Asset finance helps you spread the cost in investing for workspace, equipment, vehicles and other needed revenue. Indeed, it will boost your technologies in the short to medium-term period.
The following approaches that businesses can do:
The lender buys the needed item on your behalf. Then you pay back the lender in a few months. Consequently, you can already account the item in your balance sheet as both an asset and a liability at the
start of the repayment agreement. This way, you can take advantage of tax perks accorded to owners of machinery.
You are responsible for maintaining and ensuring the asset throughout the term.
Hire purchase contract
You repay the lender who buys the item. Then, see after which you are given the option to purchase the asset for a small sum. During the repayment, the full value of the asset appears on the lessee’s balance sheet as an asset and liability.
The lender will buy the item you need but it stands as a lease to you. It is an option when you need an expensive item that is not usually available in the market for leasing. However, you do not intend to buy and use longer than after the repayment period.
In most contracts, you are responsible for the maintenance. But once the lender takes back the asset at the end of the agreement, the maintenance resides with the lessee.
The item, being rented for a pre-agreed term, does not appear on your balance sheet as a liability, rather an expense.
Asset refinancing / commercial loan
Asset refinancing for business refers to the use of a company’s assets as security to obtain a loan. Assets pledgeable as collateral can range from accounts receivable, inventory, equipment and buildings.
Asset refinancing can also be combined with other financing approaches. For instance, you bought a 10,000 worth vehicle based on a hire agreement wherein you own a sixth of it while the lender owns the remaining portion. If in the future you want to own the vehicle, you can buy the lender’s stake through getting finance from an asset refinancing provider.
How to apply and secure approval?
Lenders look at your credit history and growth prospects to check your ability to make repayments. The life of the asset finance contract can stretch up to five years. Hence, the borrower will settle repayment every month. However, some lenders are more flexible than others in adjusting repayments schedules, an arrangement most beneficial to businesses that generate revenue on a seasonal basis.
The size of lending varies depending on your type of business. The size for financing across United Kingdom-based providers is ranging from £5,000 to £1 million.
Some alternative providers allow online applications for more convenience and can often translate to same-day decisions.
There are tax perks when you buy or lease an asset
Here are some things to know and consider before applying for asset finance:
The kinds of incentives you can enjoy depending on the type of asset purchased and whether you purchased the assets outright or on an instalment basis. This also affects whether the charging of VAT will be upfront or periodically. Renting or leasing an asset is an expense and, as such, can help reduce your tax bill. If your business is under the registration of VAT, you can reclaim VAT paid for assets if you will use it for business purposes. You can also claim capital allowances—proportion of the cost from your taxable profits each year— if the equipment is bought outright, through hire purchase or supplied under a long funding lease
You may pay a much higher cost than when purchasing the item on a one-time payment
Moreover, there are several fees with asset finance. If cash reserves are sufficient, paying for the upfront cost is the much-preferred route if you think you will be using the asset in the long term. Some merchants even offer small discounts when you pay for an item in full. A detailed calculation is critical in coming up with the right decisions.
How technology affects depreciation of items
It’s better to lease items that depreciate fast, especially if the market demand for the item declines after five years. Technology plays a significant role in this determination of an item’s market value. As such, industries that are easily penetrated of technological disruptions are more exposed to fast depreciating assets.
Some require a deposit or advanced payment
some lenders require this to reduce risk. There are no penalties once you default in your payment, but if you default, you lose the equipment to the lender who will resell its to recoup the debt. This is a big drawback to those who expect to have the asset under their possession by the end of the contract. However, for lessees with no plans of acquiring the asset, there’ll be no impact on cash flow since you only pay for what you need.