What Is Asset Finance?
Essentially, businesses use asset finance solutions to buy equipment without having to pay a lump sum upfront. In most cases, asset finance helps fund plant, vehicles, production equipment IT and telecoms systems. First, an asset finance provider funds the purchase. Subsequently, the business makes regular contractual payments over an agreed period of time. It leases the asset for a duration between 12 months and 6 years for a fixed payment, unaffected by interest rates.
Importantly, the finance provider owns these assets until final payment is made. Because the assets stay off the borrower’s balance sheet, leasing finance is tax efficient. On top, it improves cash flow as lower payments spread across a period of time. Unlike with an overdraft, however, borrowers cannot withdraw the facilities, although they can make early repayments.
Four Key Asset Finance Solutions
When dealing with asset finance companies, businesses can usually choose between the three most common types of asset finance solutions: hire purchase, finance lease and operating lease. Apart from this, sale and leaseback offers you to release capital on an asset you already own.
If you want to acquire vehicles, machinery, equipment and other hard assets, hire purchase may be most suitable. Like with classical asset finance, the lender purchases the asset and businesses make regular repayments at a fixed price. During the lease period the lender is responsible for insurance and maintenance of the asset. As for the business, its accountants can offset the hire purchase interest and charges against pre-tax profits. If businesses are VAT registered they can also reclaim VAT on a hire purchase. At the end of the lease period, the borrower has the option to buy the asset outright. In that case, the asset title passes from the asset finance provider to the business.
If there is no need for you to purchase an asset consider a finance lease agreement. During the rental period businesses will pay the full cost of the asset, including interest. In turn, they acquire ownership and responsibility during the lease period. When the primary lease approaches its end businesses can choose to continue to use the asset and enter a secondary rental period. Alternatively, the borrower agrees for the provider to sell the asset, and keeps a portion of the income from the sale. Because of the sale option, finance lease particularly suits larger assets with significant resale values. Finally, the borrower can simply return the asset back to the asset finance provider.
Similar to a finance lease an operating lease allows a business to rent an asset from a lender while they need it. Unlike with a finance lease, however, an operating lease only covers part of an asset’s useful life. Since the rent is based on the difference between the asset’s original purchase price and its residual value businesses pay a reduced rent. For as long as the borrower needs it he can use the asset. Importantly, the borrower does not take on the responsibility of disposing of the asset or recouping its residual value at the end.
Sale and Lease Back
If you already own an asset and want to release capital sell it to an asset finance provider and lease it back. Refinancing is a quick way to access cash from assets on your company’s balance sheet. Above all, sale and lease back eases cash flows and allows a business to use the funds elsewhere in the company. Essentially, the lender purchases the asset from the business and finances it back. Repayments usually align with the income stream that the asset will generate. At the end of the refinance term, the business will usually re-own the asset. Interestingly, sale and lease back also works under a finance deal with another provider. This type of asset finance also works for sole traders, and for most types of assets.
Whether hire purchase, finance lease or operating lease, asset finance
- provides you immediate use of the asset without paying for it all at once;
- frees up working capital for business growth;
- opens up another credit line separate from bank loans and overdraft facilities;
- works with lease contracts structured for the length of time you require use of the asset;
- usually also works for business owners with adverse credit histories;
- allows businesses to offset payments against corporation tax;
- protects against obsolescence and depreciation of owned assets;
Underwriting and Costs of Asset Finance Solutions
Although asset finance deals are secured against an asset, lending criteria still take the financial health of a business into account. Some lenders accept both hard and soft assets. And some only deal with hard assets, which have a higher resale value. Finally, the type and value of an asset count: Not every lender finances coffee machines, or airplanes.
Depending on the length of the agreement, lenders expect the borrower to make a deposit between 0 and 10%. The shorter the lease agreement, the lower the deposit.
To give you an overview of prices, tier 1 lenders such as Aldermore and Lloyds Bank offer flat rates between 2.5 and 4% and 5 to 8% APR. Tier 2 providers Close Brothers, Haydock Finance and others provide flat rates of 4.25 to 6% and 8 to 12% APR. Providers in tier 3 such as Armada and Kingsway Finance take a more flexible and personal approach at flat rates of 6 to 10% and 12 to 20% APR.
Asset Finance Brokers
As whole-of-market brokers CC Finance work with a select panel of more than 20 specialist asset finance companies. Because we liaise with lenders across all three tiers we are able to choose the lowest cost most appropriate deal for clients. Some lenders specialise in industries such as healthcare and manufacturing, whereas others focus on soft assets.
Because this type of finance is secured against an asset, most asset finance companies accept deals within 24 to 48 hours..
At CC Finance, we provide you with a fast, competitive quote to lease any capital equipment for the running of your business. This includes even ‘small ticket’ items from £2,000 in capital value.
For a no obligation discussion, best advice and generally a same day quotation call us today or submit an enquiry and we will contact you.