What Is Asset Finance And How Does It Work?

Starting and operating a business is never easy, whether it is a small company or a large corporation. There is always a need to purchase assets to either support or grow an organization. This is where asset finance comes into play.

Unlike a traditional bank loan, asset finance is quicker to obtain. Asset finance is a loan provided to businesses based on the financial strength of their balance sheet assets. The balance sheet assets can include anything, such as short-term investments, buildings, mortgage, vehicles, trade receivables, etc.

How Does Asset Finance Work?

You can borrow as little as £1,000 to as large as around £10 million, depending on the financial institution and nation via asset finance. There are various types of asset finance to grow your business. Your job is to find the right kind of asset finance for your needs. Discussed below are the different types of asset finance:

1. Hire Purchase/Lease Purchase

This type of asset finance is excellent for individuals who want to use the asset right away. In this model, the hire purchaser finances the asset in their ownership. They lease the asset to you via an agreement that you agree to pay the full amount of assets over the specific period.

You have an option to pay a large sum or a small sum of money initially. After the initial payment, you agree to pay installments to the hire purchaser till the full amount is covered. You will need to mention the cost of the hire purchase as business expenses in your Profit and Loss Account.

2. Finance/Capital Lease

A finance or capital lease is a little like hire purchase, but not entirely. In this asset finance model, you are liable to pay the asset’s rent for using it over the period. The agreed period can be anywhere between 1 to 5 years or more. Furthermore, you also need to maintain the asset to keep it in the right condition.

The full value of the asset will be in your company’s balance sheet over the agreed period. Moreover, your business will treat the rent as business expenses in your profit and loss account. Upon the end of the agreed period, you may have an option to purchase the asset via a third party.

3. Operating Leasing

If you do not want assets for their entire working life, operating leasing might be a good option for you. This type of financing is a popular option for educational institutions. Here, you need to pay for using assets over the agreed period. The payments appear on your profit and loss account, while the balance sheet will not record the asset.

After the end of the agreed period, the finance company will take back the asset. You have nothing to do with the maintenance of assets after you are done with the use of the asset.  

4. Equipment Leasing

Equipment leasing is a type of asset finance where the financing company purchases the asset for you. They lease the asset to you for a certain period as per the agreement. Once the specified time is over, you may choose to end the deal or extend the contract.

The ownership of the equipment remains with the lessor, and the lessor holds the right to cancel the agreement whenever they like.

5. Asset Refinancing

Asset refinancing is a bit different from the other types of asset finance discussed in this article. This asset refinancing allows you to acquire a loan based on the assets your business is holding in the current moment. It is possible to get around 80% of the asset amount as a loan.

Once the third party agrees to asset refinance, you will be liable to repay the loan with interest over the period.

How Long Does Asset Finance Last?

The duration of asset finance depends on the asset agreement and the operational lifetime of an asset. Usually, you can expect it to last between 1 to 7 years.

Can You Purchase Secondhand Assets?

Yes, you can purchase a secondhand asset via asset finance if it is in good condition.

What Types Of Assets Can You Purchase?

You can purchase both soft and hard assets. Soft assets include a less durable asset like software, electronics, IT equipment, etc. On the other hand, hard assets comprise assets like machinery, vehicles, buildings, etc.

Final Thoughts

Financial institutions understand the needs of small businesses. It is not always appropriate to apply for a traditional loan to operate a company. This is the reason why there is a provision of asset finance. Getting asset finance can quickly help in managing your business without hindering the current processes of the organization.

Are you currently looking for asset finance? If you require immediate financing to grow your business, asset finance can be of great help to you.

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