There are a number of different asset finance arrangements available to businesses. Each different option might be the optimum solution, depending on the business’s circumstances. Take a look at our asset finance guide to find out which product is best for your business.
Operating leases:
First in our asset finance guide is leasing. This is a short-term rental option, where the business gets to use the asset for a limited period, which is likely to be no longer than 10 years. The lease period is usually shorter than the asset’s useful life, meaning that the business can have access to the most up-to-date equipment at all times.
Suitable for: businesses that don’t want to be burdened with the responsibilities of owning the asset, such as maintenance; or who don’t want to incur the risks of assets becoming outdated.
Finance leases (also known as capital leases)
This is still a rental arrangement, but the lease period is usually longer than for operating leases and may last for most of the asset’s useful life.
During the primary rental period, it’s likely that the total rental payments will be equivalent to the full cost of the asset, plus interest.
At the end of the primary rental period, the business can choose to:
- Negotiate rental of the asset for an additional period
- Return the asset to the provider
- Sell the asset
With a finance lease, you don’t become the owner of the asset – at the end of the term, you either have to stop using the asset or negotiate another rental period.
Suitable for: businesses that might want the option of using an asset for a longer period, but without the responsibilities of ownership; or that might want to release some cash at the end of the rental period by selling.
Another product in our asset finance guide is hire purchase. This involves a business purchasing an asset and then paying the purchase price in installments over a period of time. The business becomes the legal owner at the end of the term once all payments have been made but is normally responsible for insurance and maintenance of the asset during the repayment term.
The lender will usually ask for some of the purchase price, perhaps 10%, to be paid upfront as a deposit. Sometimes, a larger lump sum is required as the final payment, which is known as a balloon payment.
The term of a hire purchase agreement might be anything between one and six years.
Suitable for: businesses that anticipate being able to use the asset for an extended period of time.
This option can be used for assets that the business already owns. The business surrenders ownership of the asset to the lender for the term of the agreement, before regaining ownership at the end of the term.
The finance provider lends a portion of the asset’s value, and the business then repays this loan over a term which might typically be around 10 years. During this time, the business can continue to use the asset in the usual way and retain responsibility for insuring and maintaining the asset.
Interest rates for asset re-finance might be in the region of 6% to 9% per annum and depending on the value of the asset and the size of the business, it might be possible to borrow anything between £5,000 and £50 million.
Suitable for: businesses that already own assets but wish to raise additional capital by using their assets as security.
Vehicle asset finance (contract hire)
As the name suggests, this form of finance can only be used for company vehicles. The business enters into an agreement with a finance provider, under which the provider sources a suitable vehicle.
The provider remains the legal owner of the vehicle and retains responsibility for insurance and maintenance. At the end of the term, it falls to the provider to dispose of the vehicle.
Before that, during the term of the agreement, the business makes payments of an agreed level to the provider, in return for having full use of the vehicle.
Suitable for: businesses that require a company vehicle but don’t wish to take on the responsibilities and costs of owning one.
Revolving credit facilities are often offered on an unsecured basis but can also be set up as secured lending.
The provider agrees to lend a portion of the asset’s value, say 80%, and the business can then borrow an unlimited number of times during the term of the agreement, provided the pre-agreed limit is not exceeded.
Suitable for: businesses that might want to borrow cash on several occasions over a period of time, rather than receiving a single lump sum at the outset. For example, it might suit businesses with fluctuating cash flow.
To find out more about asset finance, get in contact with the team at Funding Bay. One of our specialists can give your business a consultation.
