Asset financing

What is asset financing?

Is asset financing the best way to secure a capital injection?

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Asset financing guide

If you’re running and business and need to invest – for example, to replace old equipment – what can you do if you don’t have free capital to hand?

What if you’re simply looking to expand your business without overstretching and endangering your financial position?

It’s possible that asset financing could provide a solution. 

But how does asset finance work? And is it right for your business?

Let’s find out…

What is asset financing?

If you’re running and business and need to invest – for example, to replace old equipment – what can you do if you don’t have free capital to hand?

What if you’re simply looking to expand your business without overstretching and endangering your financial position?

It’s possible that asset financing could provide a solution.

Using asset finance essentially means taking out a loan to buy or lease assets needed for your business to thrive.

Depending on the nature of your business, the assets concerned could be anything from basic office equipment to a fleet of cars or vans.

Many asset finance arrangements are hire purchase contracts which give you immediate access to assets that you only own outright after completing a series of payments, for example, over one or two years.

Others are straightforward leasing agreements with which you pay to rent the assets concerned but do not own them at the end of the term.

Businesses that already own assets but are struggling financially can also borrow against those items using asset refinancing while continuing to use them.

How can it help businesses?

Asset financing agreements are a flexible alternative to bank loans.

Their main advantage is that they allow you to obtain and use essential equipment, or whatever other assets your business needs, without making a lump sum payment upfront.

In other words, they make it easier to manage cashflow and keep your accounts in the black while investing in the assets you need.

How does it work?

How an asset finance contract works depends on the type of contract:

Hire purchase asset finance agreements generally last between 12 and 72 months. They involve you paying a deposit plus fixed monthly installments for the agreed term, after which the assets are yours.

Leasing asset finance agreements involve the lender buying assets, such as agricultural or haulage equipment, and leasing them to you for a fixed monthly sum. You can therefore access the assets you need without visibly borrowing money or using up your capital.

Refinancing asset finance agreements are aimed at businesses that have already invested in equipment and now need to release some of the capital tied up in those assets. They involve the lender buying the equipment from you and leasing it back to you over a set period during which you make regular payments.

What are the advantages?

The advantages of asset financing include:

  • You get access to the latest equipment
  • Most agreements come with fixed interest rates
  • As it is secured against the assets concerned, funding of this kind can prove easier to obtain than a bank loan
  • The fixed payments make it easy to manage your budget
  • If you can’t pay, you only lose the equipment – nothing else
  • The agreements can’t be cancelled as long as you keep up the payments
  • Leasing agreements may include equipment servicing and the option to replace or upgrade equipment at the end of the fixed term

What are the disadvantages?

The disadvantages of asset financing include:

  • It can be more expensive than buying an asset outright
  • You may find it hard to cancel a long-term agreement
  • In many cases, a deposit or advance payment of some kind will be required
  • You can’t deduct the value of equipment funded through asset finance from your profits for tax purposes.

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