Asset finance can refer to any one of a number of different business financing options where a business asset is used as security. Examples include hire purchase and asset refinance.
If you run a manufacturing business, asset finance might be particularly useful, as you’re likely to already own, or want to acquire, a number of different tangible fixed assets that can be used as security for a loan. Examples might include production line machinery, packing equipment, refrigeration equipment, generators, IT equipment, company vehicles, commercial property, and many more.
You probably don’t need anyone to tell you that being able to access the right machinery and equipment can be vital in helping your business innovate, stay ahead of the competition, and maintain quality standards. Having inefficient equipment or machinery that’s likely to fail can have disastrous consequences. Asset finance gives you the chance to use state-of-the-art machinery and equipment without having to pay the full purchase price upfront.
Depending on your business’s individual circumstances, any one of these asset finance options might be appropriate:
This involves purchasing a new asset. However, instead of paying the full value of the asset at the start, the purchase price plus interest is paid in installments over an agreed term, which might be anything up to seven years.
During this term, known as the ‘leasing period’, the finance company is the legal owner of the asset, as they effectively agree to purchase it on your behalf, but you still have full use of the asset. You become the legal owner at the end of this leasing period when you have made all of the repayments.
If you fail to maintain repayments, the provider is likely to repossess the asset, and you will no longer be able to use it.
Like hire purchase, asset leasing would be used when you want a new business asset of some kind. However, unlike hire purchase, you’re not making a decision to buy the asset at the outset, instead, you simply lease it from the finance provider over the term of the agreement, which might typically be anything between one and five years.
You would make regular payments to the provider in exchange for the right to have full and exclusive use of the asset. At the end of the term, the provider will usually make its own arrangements for disposing of the asset. It is possible, though, that your particular agreement will include an option for you to purchase the asset, in which case you can decide at the time whether you wish to do this.
Unlike hire purchase or asset leasing, asset re-finance is an arrangement that concerns an asset your business already owns.
With an asset refinance, a lender agrees to lend you a sum of money, with an existing business asset acting as security for the loan. You can use the loan funds for any business purpose.
Over the term of the agreement, you repay the loan amount, plus interest, in regular installments. For a period of up to 10 years, the lender temporarily takes legal ownership of the asset and can repossess it if you fail to maintain repayments. As long as you maintain repayments, you can continue to use the asset in the same way as if you owned it. At the end of the term, with all repayments made, you once again become the legal owner of the asset.
This is similar to asset refinancing in one respect because it concerns an asset you already own. Unlike asset refinancing, however, this type of arrangement involves permanently surrendering ownership of the asset to the provider. You can then use the sale proceeds for any business purpose.
The provider does, however, agree to lease the asset back to you over an extended term. You make regular rental payments in order to retain the right to use the asset.
