Following the 2007-8 financial crisis, financial services were shaken up and a much wider variety of funding types became available to businesses.
The only downside is that there’s now so much choice available that it can be difficult to know where to begin, but with a bit of research, you can soon get a grip on the finance that’s right for your business.
One of the areas which has seen big changes in recent years is asset finance.Here we give you a brief guide to the finance available for when you need to buy new equipment or assets for your business.
What is asset finance?
Asset finance relates to the way you pay for the physical assets in your business, whether that’s to help you get new assets (asset finance), or money loaned against your existing assets (asset refinance).
Assets can be anything that’s vital to the operation of your business, such as large-scale plant or machinery, any type of vehicle or fleet of vehicles, catering equipment and even commercial premises.
Because of the added security it provides, there’s plenty of flexibility available with asset finance products, such as seasonal payment structures and balloon payments.
There are many different types of asset finance, some of which we’ve outlined below.
This simple form of finance enables you to purchase an asset by spreading the cost over a set period of time. You pay the lender monthly and at the end of that set period, the asset is yours to keep forever. You are responsible for the maintenance and upkeep of the vehicle as if it was yours from the outset. Tax wise, this appears on your balance sheet as an asset from day one.
One thing to remember about hire purchase is that you might end up paying the lender more than the ticket price of the asset. That’s because the lender adds their premium onto the price you pay.
This is more like renting. With equipment leasing the lender buys the item and you pay monthly to rent it for a set length of time. Once that time period ends you can either extend the lease, upgrade to a newer asset, pay the remainder owed to buy it outright, or just give it back to the lender.
Unlike hire purchase, you’re not paying to own and therefore the responsibilities of ownership are not all yours from day one. Things like servicing and maintenance are generally covered by the terms of the lease. This is great when you only need something for the short term, or if it’s important to your business to always have the latest models and newest technology.
Tax wise, this is an operating cost and is often written off against gross profit.
Finance leases/capital leases
Finance leases/capital leases are a kind of cross between hire purchase and equipment leasing. You’re paying to rent, but for the majority of the asset’s life rather than two or three years. While you will pay the full amount over time, you never technically own the asset so it appears as an operating cost and you can claim the VAT.
You can use your existing assets to release cash into your business, consolidate debt or provide security when structuring a deal. Lenders will typically be able to lend up to 80pc of the value of an asset, but some can stretch that depending on your situation.
Why you might choose asset finance
Physical assets can be vital to your business, yet they can also be very expensive. If you’re a removals firm with one van, for example, it might be devastating to your business if anything happened to that van and you needed a new one immediately. You may not have the money to buy one outright, or even if you do, buying outright might wipe out your rainy-day fund, or money you had set aside for another purpose.
Even if you did have the money, perhaps some of the vehicle hire or leasing options outlined above make more business sense for you. That cash might be put to better use paying for something else in your business, and asset finance might simply be another source of funding for your assets.
Asset finance is also useful for funding growth in your business. If you’re struggling to cope with the demand for your removals firm, you might want to get a second van. Although buying it through asset finance will bring with it a monthly repayment, that second van could lead to a doubling in turnover and therefore a very worthwhile investment.
Annual Investment Allowance for asset finance
If you’re thinking about buying assets for your business, it’s also worth being aware of the Annual Investment Allowance (AIA).
This initiative was originally brought in by the Government following the 2007-08 recession in a bid to stimulate the economy by encouraging businesses to invest in the machinery, equipment and assets they needed to grow.
The AIA allows you to deduct the cost of the asset from your profit for that year, before working out how much tax you need to pay on that profit.
Originally the amount you could claim on was capped at £200,000, but in January 2019 this was increased up to £1 million and businesses can claim tax relief up to that amount.
‘If you’re considering buying a new asset, now might be a good time to do it’
This increase is temporary and is due to change again on December 31 2020, so if you’re considering buying a new asset, now might be a good time to do it.
Not all assets are eligible for AIA – you can find more information on the Funding Options website.
Fund your next business asset
Asset finance represents a really useful funding solution for businesses, whether getting new items that are vital to your operation or unlocking much-needed cash from the assets you already own.
There are many different lenders, with many specialising in lending to specific industries. Using our expertise and this introduction to asset finance, you should now feel more confident to find the funding for your next business asset.
Conrad Ford is founder and CEO of Funding Options, the UK’s leading online marketplace for business finance. Funding Options helps businesses find the right funding for their situation. Whether they want to grow, they’re fighting for survival, or simply need to pay a tax bill, @FundingOptions is helping the small walk tall