Asset finance: new funding source for UK business owners

What is asset finance?

Asset finance is a popular method of borrowing money by using a company's assets like stock or accounts receivable, as security against a new loan. It's a quick and convenient way to get farm machinery, and, or vehicles, without making a hefty upfront payment, in an inflationary business climate. You can simply pay a fixed monthly amount to use the asset, over an agreed period, thus, you avoid paying the full cost outright and, any related maintenance costs.

Business owners have the flexibility to choose which assets they are comfortable putting forward, and this can be anything from cash to plant and machinery, or even your business premise. For example, a farm business owner might decide to use agricultural land to secure funding for a replacement silage feeder. The loan amount is worked out based on the market value of the asset — the higher the value, the bigger the loan you can get.

Types of asset finance and leasing

In essence, there are three main types of asset-backed finance: hire purchase, contract hire, and finance leasing. 

Asset finance for UK businesses is growing in popularity, as business owners can have full use of new equipment and machinery without bearing the responsibility for ongoing maintenance, and, importantly, you can choose to return it to the lender or keep the asset at the end of the lease agreement, as long as all outstanding payments have been cleared.

Hire purchase 

Hire purchase is a way to rent a business asset with an eye to purchasing it at the end of the agreement. With a hire purchase agreement, you legally own the item once the final instalment has been paid. This is the same as a personal loan, you borrow and pay off the loan, and you finally take full ownership of the vehicle, machine, or equipment at the end of the contract. 

Contract hire

The second type of commercial asset finance is contract hire. Contract hire is a type of SME asset finance that is well-suited to sole traders, partnerships and limited companies who need vehicles and machinery without the need to pay upfront. Contract hire is popular with VAT-registered companies because they can claim back 50% of the VAT on commercial vehicles and 100% on vans.

Business owners can instead use their cash flow to grow their business in this period of spiralling business costs, where the financial risk of owning vehicles, damages etc, is passed over to the lender. Short-term rentals are possible for anywhere between one and 28 days, however, the usual timeframe is, on average, four years.

Finance lease

A finance lease is an agreement for businesses that need commercial vehicles and vans, or other assets in situations where a contract hire is not on the cards. A finance lease offers flexibility and tax benefits to eligible UK companies who require a business-critical asset but don’t want to put cash flow at risk, by purchasing outright. 

Asset finance: pros and cons

Asset finance solutions can be broken down into the following merits and disadvantages.

Pros

• Faster access to business assets

• Maintain control over working capital

• Fixed monthly repayments aid cash flow management

• Fixed interest rates

• Competitive edge by getting the latest equipment and technological innovations

Cons

• There is a risk of losing a valuable asset put forward as collateral

• The value of the assets may decrease with the risk of low valuations

• It's not as well suited to long-term business finance

• Asset finance can help small businesses, but it's important to talk to an advisor for a financing method tailored to your business model

Financial benefits of asset finance

Asset finance makes it easier to raise funds than with a traditional business loan. By allowing you to avoid hefty upfront payments, and ownership costs like maintenance, you can better maintain cash flow in your business. Asset financing is different to taking out a standard loan for your business in that already-owned assets are used as security to make the agreement possible. At the end of the lease, the vehicle can be sold for a profit. If the sale price is below the agreed resale value, you will need to make a further payment to the asset finance lender to cover the difference.

Some additional benefits of asset financing include the following:

• Avoid depreciation and obsolescence

• Secure additional lines of credit

• Release tied-up cash

• Fast approvals 

• Remove cash flow uncertainty

• Reduce wasted expenditure