What is Asset Finance?
Published by Fusion Finance on 4th November 2019 -
An introduction to Asset Finance
Asset finance is a type of finance that gives businesses access to assets such as vehicles, equipment or technology, that they need to prosper and grow. It typically involves paying a regular fee to use the asset over an agreed period. The main advantage is that it avoids the business having to find the full cost of buying the equipment upfront and thus helps preserve working capital.
Asset finance can also be used to release the ‘cash value’ that is tied up in the assets that the business already owns. Once released, this cash can be redeployed elsewhere within the company. This type of product is often referred to as asset refinancing or sale & leaseback finance.
Like any financial product, asset finance can be a little daunting to the uninitiated, packed as it is with jargon and acronyms that seem to be designed to confuse the inexperienced. This is why, at Fusion Finance, we always strive to offer our clients clear, impartial advice and also aim to answer questions in plain simple English.
Finally, our key aim is to make sure that whichever type of asset finance product you choose is the correct one for you and your business. We also appreciate that business is always in a hurry, which means we do everything possible to offer rapid funding decisions whilst our asset finance specialists are always on-hand to answer your questions and guide you through the process.
What are the Different Types of Asset Finance?
At Fusion Finance, we offer a range of asset finance structures, some of which are briefly outlined below.
This is an agreement for the hiring of an asset for an agreed term with the option to purchase the item for a fee, often known as a balloon payment, at the end of the contract. With Hire Purchase, you usually pay a larger amount up-front, typically 10% of the purchase price plus all of the VAT due on the total purchase price. You then pay the balance in instalments over an agreed timescale and at a fixed rate of interest with an option to purchase the asset at the end of the contract. The legal title to the asset will pass to the borrower once all repayments, including any balloon payment, have been made.
Advantages include tax efficiency as the charges are an allowable expense against profits. Repayments can be flexible as you can reduce the monthly repayments by increasing the balloon payment at the end of the loan. In addition, some lenders will allow you to vary repayments to match any seasonal fluctuations in the business. Disadvantages include not being able to own the asset at the end if you cannot afford the final balloon payment.
A finance lease is a longer-term lease designed to operate for most of the lifetime of an asset. The borrower effectively acquires all of the financial benefits and risks from using the asset without ever owning it. At the end of the lease, there is often an option for the borrower to acquire the asset or extend the lease on a reduced ‘peppercorn’ rent.
Advantages include low upfront cost, VAT is charged on each lease repayment and reclaimed as normal, and at the end of the lease, you will usually receive a share of any proceeds if the asset is sold.
Disadvantages include never owning the asset and being liable for the cost of repairs and maintenance.
Operating leases have a shorter duration than finance leases. The length of the agreement is always significantly shorter than the working life of the asset. You cannot become the owner of the asset at any time but, contrary to financial leases, you will not share in any sale proceeds at the end of the lease. Larger assets that have significant resale values such as industrial or construction equipment, boats or aircraft are often financed using this type of lease.
Advantages include a low, upfront cost; VAT is charged on each lease repayment and reclaimed as normal and you don’t have to worry about selling the asset when it is no longer needed.
Disadvantages include never owning the asset and not benefiting from any sale proceeds at the end of the contract.
Sale & leaseback
Sale & leaseback is slightly different from the previous three types of asset finance in that it is a method of releasing money from items that the business already owns. The money raised can then be redeployed as working capital, to cover another funding need or be used to finance additional asset purchases.
Sale & leaseback allows you to raise funds relatively easily. The amount you can raise is limited by the type and age of the asset, and you are also restricted by the amount of equity available in the asset.
Although asset finance can be very flexible, there are some restrictions. Examples include the asset having to be critical to your business operations, and also being ‘mobile’ meaning that it can easily be removed from your business, in case of default.
Which is the best asset finance for my needs?
Deciding which is the best type of asset finance for your business really comes down to how are you going to use the asset and also your repayment preferences.
Businesses will often choose hire purchase if they want to keep the asset long term and are happy to pay a larger amount up-front. In addition, the VAT on the purchase is usually reclaimed in full in the normal way.
In contrast, leasing usually has a lower up-front cost, and the VAT element of the purchase is charged on each repayment period and claimed back over the term of the loan.
You should always consult tax, VAT or accounting specialists to determine which type of finance is best suited for your particular business circumstances.
How much can I borrow and what can I fund?
Asset finance is suitable for a wide range of asset types. It can be used to fund purchase of assets from a few thousand to several million pounds in value.
Assets that can be financed include so-called hard assets such as manufacturing equipment, agricultural machinery, yellow plant and commercial vehicles. In addition, soft assets such as IT hardware & software, lighting and catering equipment can also be financed, and the loan facility can also cover the installation of the asset, support, maintenance and training.
Borrowers need to be solvent and have a credit profile that is acceptable to the chosen lender. If there are historical credit issues, then these will be dealt with on a case by case basis. Lenders should always be made aware of any potential credit issues from the beginning of the loan application as nothing will sour a deal quicker than a lender thinking facts are being hidden from them.
Some lenders will also allow for ‘soft starts’ where the initial repayments are lower until the asset starts earning money for the borrower. Some will even allow for ‘repayment holidays’ which help with cashflow during quieter periods when the equipment may not be earning money for the borrower.
How much interest can I expect to pay?
The rate offered to a borrower depends on several factors including which lender is selected, the type of asset being financed and the financial health of the borrower. The best rates are usually reserved for strong assets, that offer security and have a strong long term residual value. However, we always strive to obtain the most competitive asset finance deals for our clients.
Will a lender support me?
There are several high street banks who will still offer asset finance. In addition to these, we also have around 20 other leasing companies which include merchant banks, challenger banks and specialist lenders all keen to lend to the right businesses.
What paperwork will I need?
When approaching a lender, a borrower will need to provide a range of information including but not limited to the following:
- The type of asset being purchased including make, model and serial number.
- If it is pre-used then its age, condition and hours used will be required.
- For vehicles the registration number, chassis /VIN and mileage.
- Supplier name and address including bank account details
- Quotation for overall cost of the asset(s) including delivery and any details of part exchange or deposits
- Last two years of company accounts
- Last three months bank statements
- Photo ID
There are many asset finance products available, and they can be taken out on almost any asset valued from a few thousand pounds to several million. Our access to the wider market means that we can often secure you better terms, whilst always ensuring that you fully understand exactly what you are committing yourself to.
So whether you’re thinking of unlocking the value in items, you already own or purchasing equipment for your future business needs Fusion Finance can provide you with a fast, competitive quote on any capital equipment necessary for your business.
If you require any additional information or are ready to move ahead with an asset finance project, then please get in touch. Our advice is offered freely, in confidence and without obligation.
So if you require any additional information or are ready to move ahead with a development project, then please get in touch.