Asset-based finance refers to a situation in which a business obtains financing when they purchase a new asset, and the asset is then used as security against the lending. The two most common types of asset finance are hire purchase and lease finance. The term ‘asset’ can refer to a number of different items, and is most popular with businesses who want to purchase vehicles, equipment and machinery. In this guide we provide an overview of some of the key benefits of asset finance. We also look at why it is such a popular option for businesses that require new vehicles, machinery and equipment every few years, but do not necessarily have the capital to purchase these assets in full.
Why use Asset Finance?
Access to new equipment
One of the greatest and most obvious advantages of asset finance is that it provides a business with a way to purchase new machinery that they may not have been able to afford if payments were not spread out. This can have a number of benefits, including increased efficiency and greater output through machinery that is replaced on a reasonably regular basis. New machinery can also help businesses to expand at a faster rate through increased capacity.
Following on from the recent economic recession and the subsequent legislation which has made banks’ lending criteria even more stringent, many businesses who do not ‘tick all the boxes’ are finding it very difficult to secure funding from the banks. There may be a number of reasons why a business does not have a perfect credit history, and, as everyone’s situation is different, a good asset finance business will judge each finance application on its own merit. The finance company will of course always have their own lending criteria that must be met by any business they lend to, but you can generally expect more flexibility than you would get from a bank.
Good for cash flow
As briefly touched upon earlier in the guide, one of the reasons that asset finance is a popular financing option is because payments are spread out over an agreed term, which frees up working capital. A typical term is between two to four five years, as this is generally the kind of timeframe that allows businesses to make manageable monthly payments and also means that machinery can be replaced at the end of the agreed term. Companies that have more capital available up front often favour hire purchase whereby title to the asset transfers to the company at the end of the payment term, as strong cash flow enables them to pay the VAT due on the asset that must be paid up front, whereas companies for whom cash flow is more of an issue often favour leasing, as VAT is only payable on the monthly rentals over the term of the agreement.
A better understanding of your business
As asset finance tends to be most popular within a handful of industries including waste management, plant machinery, construction, agriculture, forestry and print, well-established asset finance companies have a strong understanding of businesses within these industries. Experience of working with similar businesses means the asset finance company instantly understands your business and can therefore advise on the most appropriate type of finance. This compares to other possible ‘alternative finance’ options such as crowdfunding and P2P lending, where often the funders do not know or understand the businesses they are funding and their sole concern is the return generated from their investment.
Tax benefits through capital allowances
‘Capital allowances’ refer to financial deductions available to UK businesses on their corporation tax bill. These allowances are available on a variety of items and equipment, including plant and machinery, meaning that businesses taking out certain kinds of asset financing on these items can offset some of the payments made. It is recommended that you speak to the asset finance company for more information on this. An in-depth guide to capital allowances is available on the HMRC website.