Whether you need to replace deteriorating machinery to increase productivity or expand, as a business owner, you have a number of financial options open to you. The important thing is to understand which is better for your business. Asset finance is good for some situations, but some companies struggle to pay off any finance they used to purchase the equipment first time around so think carefully before deciding.
Re-financing equipment or other assets is more than acceptable if you want to fund growth and it can often be a cost efficient way to access liquid funds, although history has shown that asset finance is more popular among companies who are struggling because of cash flow problems.
So what is Asset Finance?
Asset finance is basically using credit or leasing your facilities to fund the purchase of items or assets that will support your business. Some common examples of these assets include:
- Cars and commercial vehicles such as loaders and forklifts
- Heavy plant machinery
- Tractors and other agricultural vehicles
- Transport busses and coaches
- Diggers and other construction vehicles
- Marine and aviation equipment
- I.T hardware
What types of asset finance are available?
Hire and lease purchasing
This is the most popular option available to you. Following completion of an agreement (stipulating monthly payments typically), your business owns the asset. Typically, payment terms last between 12 and 60 months and a separate deposit (plus VAT) is payable before the commencement of the agreement.
Finance leasing is quite similar to hire and lease purchasing, but through it, you only hire out the asset instead of buying it. Unlike hire purchasing, the VAT on finance leases is spread across the rental payments, making it easier to budget.
Instead of letting costs spiral, you can fix your monthly fees to run a car or van fleet. Contract hiring covers everything except fuel and insurance throughout the length of hire.
The forms of asset finance above are all familiar to many of us who have similar agreements in our personal life, but asset finance is often something entirely different when it comes to accessing capital for businesses. The following are less known ways to raise liquid funds.
Refinance / Equity Release
A great way to free up capital is by refinancing existing assets. In turn, you can acquire new assets and support your business. This method is often dubbed a “sale and HP back” and operates in a very similar way to hire purchasing, as the repayments are agreed across a fixed period.
So, what are the benefits of asset financing in comparison to the more traditional route of bank loans?
If you decide to borrow money from your bank, you will impact on the amount of credit you can obtain and lower your available finance in the future. Furthermore, bank loans may require additional security such as charges over freehold property. Also, your facilities are being risked if you default on your payments. On the other hand, asset financing is separate to a loan and not repayable on demand unlike a bank loan that is recallable at any time in certain circumstances.
How easy is it to get asset financing?
With the economic downturn in full swing, potential lenders are exercising more caution than ever. However, professional intermediaries are available, offering assistance in securing asset finance.
Typically, lenders will gauge the security or asset value and assess its likely depreciation over the expected refinancing period. They then determine if you are able to meet the agreed repayments. To avoid getting tied in to agreement you can’t maintain, here are a list of questions to help you secure manageable asset funding-
- Are the repayments serviceable? Are projections of realistic sales figures influencing your decisions or are you counting on an increase in investment?
- Will the asset maintain its value over time? If this isn’t likely, a lender will typically require additional security such as a charge or a written guarantee.
- Will the asset provide an additional flow of income? For example, will this new machine let you manufacture goods you were unable to previously?
- Do you own any other assets that you are able to refinance if necessary?
Lending in the market place
Due to the aforementioned economic downturn, asset financing has dropped drastically over the last several years. Looking forward however, as the economy picks up, businesses will need to make more investments to grow. There still appears to be still lenders willing to funding growth and any security increases the chances of finding suitable finance.
Choosing a Financial Intermediary
Many financial intermediaries have specialist knowledge of the market and can acquire what you need extremely quickly. If you don’t fancy going through your bank or simply want to weigh up your options, intermediaries make a great alterative.
Peter Hayman is a financial intermediary who has sourced asset finance for many SMEs and larger enterprises in England and Wales. He currently uses maxxia.co.uk for his clients.