Businesses of all shapes and sizes need to invest capital in high-value equipment from time to time. Office furniture, IT equipment, shop fittings, specialist machinery and even vehicles are all essential items, depending on what line of business you are in.
The problem for small business owners is, as they tend to operate on tight margins, finding the ready cash to buy expensive items can be difficult. The only solution to this dilemma is often assumed to be taking out a business loan from a bank, or arranging a finance deal directly with the vendor.
There is, however, another way – asset finance.
What is asset finance?
Asset finance is a bespoke lending instrument designed specifically to help with the purchase of high value equipment. It is usually offered by specialist providers, and unlike an ordinary business loan, the money is not secured against other assets held by the business.
Types of asset finance
The four most common types of asset finance are as follows:
Hire Purchase: Under a hire purchase, the finance provider purchases the equipment the client needs, and then effectively hires it out to them while they pay off the balance. Payment terms are fixed and the contract stipulates that ownership will pass into the hands of the client as soon as the repayment period is completed.
Operating Lease: In practical terms, an operating lease is very similar to a hire purchase, but without the element of client ownership. The finance provider will purchase the equipment needed and lease it to the client for an agreed period, again on fixed payment terms. Once the lease period is over, the equipment returns to the financier.
Finance Lease: This option sits part way between hire purchase and operating lease. It follows the same format as an operating lease initially, with an agreed leasing period. However, a finance lease contract gives the client greater flexibility come the end of the lease period. They can either return the equipment, negotiate a lease extension, or pay off the balance of the value of the equipment and purchase it outright themselves.
Contract hire: Contract hire is a special financing arrangement for purchasing a vehicle for commercial use. As with hire purchase, the costs are spread over a fixed repayment period during which the client is effectively hiring the vehicle from the financier. The main difference is that the repayment schedule also often includes a monthly mileage quota, changing how much gets repaid depending on use. This is to factor in the fact that vehicle values alter over time according to mileage.
The benefits of asset finance
For small businesses, the big benefit of asset finance over a loan is the fact that you do not have to put up any of your other business (or personal) assets as security. This is because the provider is not loaning any money – they are providing the asset itself, on a hire or lease basis. As the finance provider legally owns the asset, at least until you have repaid the full value, that serves as security in itself.
Other benefits include the fact that the financier cannot decide to call in the loan at any point, again because no money has been loaned. The user therefore gets greater security throughout the lifetime of the agreement.
On the other hand, asset finance arrangements are very flexible. There is a lot of scope to negotiate repayment terms in line with available cash flow, and with a finance lease, you can opt whether to return the equipment or buy it outright at the end of the repayment term. There also the possibility that the extra revenue you gain from running the equipment will cover the repayments, meaning it has paid for itself with no impact on your finances. And the leasing option protects small business owners from depreciating values of hi tech equipment.
Further reading on asset finance
Useful link: – Looking for funding? Find the right finance for your business here
