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 and 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.
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. A good asset finance house will want to get to know you and your business, understand the way the business needs to operate, any seasonal trends it might have and adjust the finance repayments to suit, offering a much more flexible approach to lending.
Good for cash flow
Asset finance is a popular financing option because payments are spread out over an agreed term, which frees up working capital and at a fixed rate allowing regular payments to be budgeted and entered into your cash flow.
A typical term is generally between two to five years, as this is generally the kind of timeframe that allows businesses to build in a life cycle of equipment or machinery that is required for their business that can then be replaced and updated at the end of the agreed term if so required.
Companies that have more capital available up front often favour a Hire Purchase facility, as this enables them to pay the vat element of the purchase price as part of their deposit, and will then own the asset at the end of the repayment term.
Companies for whom cash flow is more restrictive, often favour leasing, as VAT is only payable on the monthly rentals over the term of the agreement, thus reducing the initial outlay.
A better understanding of your business
As asset finance tends to be most popular source of funding, well-established asset finance companies should have a strong understanding of what businesses require when it comes to borrowing money. Experience of working with similar businesses means the asset finance company gets to understand your business and can therefore advise on the most appropriate type of finance whilst building a relationship and trust between you.
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. This has a negative effect if there is an issue during the term of the agreement, whereby if there is no relationship held with anyone, it is difficult to know where to go for help, whereas, if dealing with a broker or finance house that knows you, help should be at hand if required.
Tax benefits through capital allowances
‘Capital allowances’ refer to financial deductions available to UK businesses within their financial year and can reduce their liabilities on their corporation tax bill.
These allowances known as ‘Annual Investment Allowances’ are available on a variety of items of equipment, including plant and machinery and vehicles, meaning that businesses taking out certain kinds of asset financing can offset some of the costs incurred against their tax bill.
However, these allowances often change each year and it is recommended that you speak to your accountants or financial advisers for more information on this. An in-depth guide to capital allowances is available on the HMRC website.