A Simple Guide to Asset Finance

FinanceGuides

Oct 16

Defining Asset Finance

What is Asset Finance?
Asset finance is a form of loan that’s typically associated with the purchase of a high-value item, such as a piece of equipment, for use by a business with ambitions to expand. Asset finance is often applied for because a business doesn’t presently have the necessary funds to outright buy the asset. Meanwhile, another firm – with the capital to buy the asset – may still choose to approach a finance provider in order to spread out the cost.

With different finance options available, businesses can sometimes put up their own assets – be it equipment, plant, machinery or vehicles – to be used as security against the loan received from the provider. When a business needs to purchase a physical asset, they will enter into an agreement with the finance provider; once the asset has been paid for, the business will make regular payments to the financer (loan durations can vary).

Subject to the type of asset finance scheme, the item may become the sole property of the business over time, or at the close of the agreement.

What are Assets?
A very important question. By definition, any resource or object – so long as it holds value and can be converted into cash – can be considered an asset. They can be owned by governments, organizations, businesses and individuals, and help them to improve and carry out their services and or generate income.

Types of Asset Finance

Asset finance has several core types. While each has its own purpose, along with advantages and disadvantages, they adhere to asset finance principles. Here are the different types (note that the listed schemes may not be offered by all providers, so ensure that you are familiar with your chosen provider’s terms):

Hire/Lease Purchase
Not so unlike hire purchase for individuals, in this model the Hire Purchaser retains ownership of the asset to be leased over the agreed term, and leases it to the client on a regular fixed payment basis. Repayment sums and scheduling can be agreed upon; for instance, a business may want to make small, more feasible payments down the stretch, but pay a larger initial sum. There’s also the option for the business to outright own the asset at close of the agreed period.

Finance/Capital Lease
Here the business is only renting the asset, so this model differs from some other asset finance. Regular repayments agreed to a schedule will be made, usually reaching completion once the financer has recouped its purchase value of the item. While the business won’t have the option to own the asset outright, the provider may allow the business a percentage share of the item (when sold at sale value).

Equipment Leasing
Since the finance provider purchases the equipment and then rents it for a regular fixed fee, this model bears similarities to a Finance Lease. Once the agreed period is complete, the business has the option to extend the lease, upgrade the asset, purchase it (at an agreed price), or return it back to the financer.

This model differs from Hire Purchase as maintenance and servicing costs for equipment leasing fall with the provider, removing the burden of responsibility from the business itself.

Operating Leasing
Bearing a similarity to an Equipment Lease, this finance model is usually selected for specialist machinery/equipment that the business may not want to utilize for the full term of the (useful) life of the asset. Moreover, the business may just have no interest in owning it permanently.

Put simply, an Operating Lease is renting an item over a short-to-medium period, involving rental costs based on the time length the asset is needed. Due to the business only paying for the calculated value of the asset over the agreed limited lease period, this model is typically cheaper versus an Equipment Lease.

Asset Refinancing
Asset Refinancing comes in a couple of major forms. The first involves using a business’ assets – be it physical or other – as security against a loan. The second, more appropriately referred to as Asset-Based Lending, involves a business selling an asset to an asset finance provider for an agreed lump sum; the business then leases back the asset sold from the provider, repaying said lump sum.

The business can use physical assets that they may only part-own as collateral, but only up to the level of equity they have in that item; Asset Refinancing therefore differs from a more conventional secured loan.

Contract Hire/Vehicle Asset Finance
Relating to automotive vehicles only, this model is suitable for a business that wants to expand its fleet; a Contract Hire provider can source the necessary vehicle/s required, with the business paying a regular amount over the leasing period agreed.

All servicing and maintenance costs fall with the finance provider, with fleet management services often included (in the base contract hire costs) for large firms that have multiple vehicles.

With the Contract Hire model, businesses are relieved of the time and budget-consuming tasks that apply to the standard ownership of vehicles. The responsibility of locating and purchasing a new vehicle, servicing and maintenance, (and disposal of the vehicle when the leasing period ends) falls with the finance provider.

Is Asset Financing Good for You?

Times have changed considerably. Once used chiefly by large firms and corporations, asset finance is now suitable for a broad range of businesses and organizations, with options also available for small to medium-sized firms. This is possible largely due to finance minimums being lowered across the industry.

Remember, some providers prefer to specialize in financing certain types of businesses (such as limited and public limited companies) – so, to avoid wasting time, be sure to find out if they are the right fit before approaching.

Amounts You Can Raise with Asset Finance

Every asset finance provider has its own limits in terms of minimum and maximum values, but generally speaking that figure can be anywhere between £1000 all the way up to £10 million. It of course all comes down to your business’ means and outlook for taking on the loan; by law, a provider must be satisfied that you can afford all repayments prior to an agreement being reached.

Asset Finance Length

Asset finance agreements usually last between one to seven years, but the length itself is governed by the asset’s operational lifetime (OL). While a loan for a piece of equipment will almost always consist of somewhere between this period, the finance provider can reduce or extend its length.

Types of Assets That Can Be Financed

In the majority of cases, an asset finance provider will consider a broad spectrum of high-value items for purchase/leasing or to borrow against. But to be approved, an asset must first meet the criteria of the DIMS, meaning that the item/s in question must be all of the following: Durable, Identifiable, Moveable and Saleable.

Hard Assets
As you’ve likely guessed, Hard Assets are always tangibly physical items and can be high in value; they don’t usually suffer the sharp depreciation rate of a Soft Asset (see below). Included in this area are expensive machinery, equipment, plant and vehicles, and also premises such as warehouses and outbuildings, among other forms of property.

Soft Assets
Soft Assets are therefore less tangible items that come with an uncertain shelf life; typically they will experience a significant drop in value, and could have no saleable value at the end of the finance agreement. Soft Assets, then, are generally essential, day-to-day running items.

Examples include any software and equipment that’s expected to become outdated (when its own manufacturer or a competitor releases a better version), often in a matter of months. Office and security items such as IT equipment, software suites, electronics devices, shopping tills and furniture all fall under Soft Assets.

Purchasing Second-Hand Assets

Purchasing second-hand assets can be a great way to save money, and an asset finance provider will often be on board so long as the item, such as a piece of machinery, holds up to scrutiny. Finance will be offered once they are satisfied that the machinery is worth its value, is in complete working order, and has a good chance of sustaining that form through the entirety of the contract.

How Onyx can Help with Asset Finance

Whatever your reasons for acquiring, upgrading or refinancing essential business assets, we can help.