Just what is asset finance? Put simply, it’s the way that small cash-strapped businesses can buy the equipment they need without having to lob out huge capital sums. In the old days our parents called it “the never-never”!
AF is a flexible alternative to a normal loan, providing a cash-flow and tax benefits while the lender knows his cash should be safe because it’s secured on whatever it was the loan has bought. What makes AF different from an ordinary loan is that the money can’t be recalled during the lifetime of the agreement. At the point the item or equipment can usually be updated or even replaced.
So what are the advantages of asset finance? According to the AF industry, it
* Releases capital against currently encumbered assets
* Avoids issues relating to asset depreciation
* Avoids the need to sell at second hand prices when upgrading the asset.
There are several main forms of asset finance:
Leasing means that the finance company buys and owns the asset and the customer hires it, paying rent over a fixed period. At the end of the contract you usually have the choice of extending the lease, buying the asset or just sending it back.
Many leases are flexible enough to allow you to replace the, say, machinery or computer systems with more modern versions, enabling you to offer a more up-to-date product or service.
And make sure that your leasing agreement has a full service and repairing package, saving money and time when things go wrong - remember, the leaser usually has responsibility for the asset’s upkeep.
### Operating leases
Operating leases differ from ordinary leases in that the primary period rentals don’t cover all the capital costs and hire charges. The leases are shorter and the equipment will usually be sold at the end of the primary period to recover the residual value.
Hire purchase means that the customer pays an initial deposit - usually 10-20 per cent - with the remainder of the balance, plus interest, over as period of time. On completion, the customer owns the asset - but could have paid back as much as 25 per cent more than the asset’s value.
At the end of the agreement there will be an option to purchase fee which is usually nominal but can be higher. It’s worth checking what this will be before you sign up to the HP agreement.
You don’t need security or collateral and at least you will get some return on your investment - and the good news is that the taxman will be financing some of the asset for you.
Asset refinance can provide a cash injection to help you overcome a cashflow problem. The deal is that you sell equipment to an asset finance company which then leases it back to you in return for regular rent payments.
### Vendor finance
Vendor finance allows a business to buy an asset over a specific period. The vendor forwards a percentage of its value which is paid back in regular instalments.
### Import leasing
Import leasing offers the means of financing the purchase of assets from overseas from an asset management company that specialises in foreign business.