How safe is asset finance?
If you’re considering asset finance, then you can rest assured that it’s an established form of financing, offered by reputable lenders. Here at Funding Bay, we have access to a number of different providers who offer various types of asset finance.
It is important, however, to understand how asset finance works before you commit. All four main types of asset finance require a business asset to be provided as security, and if you fail to make the required repayments, this asset could be repossessed. So how exactly does this work in each case?
With hire purchase, you identify an asset that your business would like to purchase. A lender then buys the asset on your behalf, and you make regular payments to the lender in exchange for the right to use the asset.
Ideally, you will make all of the repayments during the term, covering the purchase price plus interest, and then become the legal owner of the asset at the end of the term. However, if you fail to maintain repayments, the lender can repossess the asset and then you would no longer be able to use it.
An asset leasing arrangement starts when you identify an asset your business would like to use. You then make regular rental payments while you continue to use the asset over the term of the agreement.
This type of arrangement doesn’t usually involve your business becoming the legal owner of the asset, but the asset being rented still serves as security for the arrangement, and if you fail to keep up the lease payments, you are likely to lose the right to use the asset.
Unlike the two types of asset financing we have seen so far, asset refinance involves an asset your business already owns. A lender advances you a sum of money, using this asset as security. You can then spend the loan funds as you wish within your business.
Meanwhile, you repay the sum borrowed, plus interest, over the term of the agreement.
Although asset refinancing involves surrendering ownership of the asset to the finance provider, you will regain ownership at the end of the term, provided you have made all of the required repayments. However, if you don’t keep up with the repayments, the lender could repossess the asset.
This is another type of arrangement that involves selling one of your business assets. As with asset refinance, you can use the sale proceeds for any business purpose while continuing to use the asset.
However, in order to retain full and exclusive use of the asset, you have to make regular repayments, and if you don’t, you could have the asset taken away from you.
It’s also important to understand some of the other potential pitfalls of the various types of asset finance, which include:
Hire purchase
- It can be an expensive way of buying an asset, once you have made all of the required repayments
- You might find that, by the time you have become the legal owner of the asset, its value has depreciated
Asset leasing
- Again, the total cost can be quite expensive, particularly if you have a longer-term agreement
- As you don’t own the asset, you can’t benefit from increases in its value
- You might need to be VAT-registered to be eligible
- The asset could become obsolete, superseded by superior technology, before your lease term ends
Asset refinance
- You are still responsible for insuring and maintaining the asset during the period when you don’t own it
Sale and leaseback
- As you need to permanently surrender ownership of the asset, you will be unable to benefit from any future increases in its value
- As you don’t own the asset anymore, you won’t be able to count it as an asset on your balance sheet, which will affect the overall valuation of your business
- You may need to pay capital gains tax when you sell the asset
If you’re considering asset finance, then you can rest assured that it’s an established form of financing, offered by reputable lenders. Here at Funding Bay, we have access to a number of different providers who offer various types of asset finance.
Nevertheless, many businesses have benefitted from having asset finance in place, so if you would like to find out more, get in touch with Funding Bay today.
