The term ‘asset finance’ encompasses a number of different products. However, all of them have one thing in common, which is that they involve using a business asset as a form of security.
This means that asset finance might be particularly useful for construction businesses, which are likely to use business assets such as plants, other machinery, and vehicles on a regular basis. It’s very common for asset finance providers to provide funding secured on lorries, vans, crushers, bulldozers, excavators, cranes, loaders, and the like.
Some forms of asset finance give you the opportunity to use state-of-the-art machinery and equipment, which you might not have access to if you needed to pay the full purchase price upfront. For that next big project, having the right equipment could be vitally important.
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 only upfront payment you will need to make is a deposit of around 10% of the asset’s value.
The remainder of the purchase price, plus added interest, is then repaid in installments over the term of the agreement, which might last for between one and seven years. You would usually make monthly repayments at a fixed interest rate.
As the name suggests, this arrangement involves a ‘hire’ period, followed by a time when you ‘purchase’ the asset.
During the repayment term, the finance company is the legal owner of the asset, as, at the start of the agreement, they will purchase it on your behalf. You make repayments during the hire period in order to retain full use of the asset, and then you become the legal owner at the end of this term once all repayments have been made.
If you can’t make your repayments, the lender might well take possession of the asset. You also have the option of ceasing payment and returning the asset if you no longer have any need for it.
With asset leasing, you rent an asset from the finance provider for a limited period—a typical maximum term here might be five years. You make regular repayments during this period for the right to have full and exclusive use of the asset.
In most cases, the asset will be returned to the provider at the end of the term, and they will then make arrangements for disposing of the asset. Some agreements may, however, give you the option of purchasing the asset at the end of the agreement.
Hire purchase or asset leasing involves introducing a new asset to your business, but with asset re-finance, the finance provider lends a sum of money against an asset that your business already owns. This asset is used as security for the loan.
You can use the loan funds for any business purpose, including purchases of other equipment, recruitment drives, or business expansion.
Asset re-finance agreements typically last longer than other forms of asset finance, as here the repayment term might be as long as 10 years – the exact term might be dependent on the estimated useful life of the asset.
During the repayment term, you make regular monthly payments to cover the loan amount, plus interest. Although you were the legal owner of the asset at the start of the arrangement, ownership of the asset reverts to the lender, and, if you fail to maintain repayments, they could repossess the asset. Provided you maintain repayments, however, you are allowed to continue to use the asset in the same way as if you owned it. At the end of the term, assuming all scheduled repayments have been made, you once again become the legal owner.
Again, this asset financing solution concerns an asset you already own. Unlike asset refinancing, however, a sale and leaseback arrangement involves the ‘sale’ of the asset on a permanent basis. This can, however, provide a significant cash injection, and you are allowed to use the sale proceeds for any business purpose.
Although you no longer own the asset, the provider will agree to lease it back to you in the long term, and you will make regular rental payments in exchange for the right to continue to use it.
If you’re considering any form of asset finance, talk to us here at Funding Bay today. We work with many different asset finance lenders and can help you find the right product for your construction business.
If your business is looking to use asset finance, then get in touch with Funding Bay.
Check out our Asset Finance Calculator.
