Asset finance is a lending mechanism that allows you to obtain cash based on the value of assets you own, or that allows you to get access to assets such as vehicles, machines or equipment. There are multiple agreements that fall under the asset financing umbrella and these are:
- Equipment leasing
- Hire purchase
- Finance leasing
- Operating leases
- Asset refinancing
Though asset finance is a widespread category that covers numerous valuable items in your business, there are only two general types. These are:
- Equipment finance for obtaining additional assets
- Secured lending against existing assets
Assets can be just about anything in your business. If you’re in the business of haulage, it could be your vehicle fleet while it could be the refrigerators and ovens in a catering firm. As there are many options for alternative lenders, there is asset financing available for just about anything.
Equipment Finance for Obtaining Additional Assets
It is very expensive to purchase new equipment or machinery in cash up front. On top of being risky, it is also expensive and can spell disaster for your cash flow. Also, some companies just don’t have the kind of working capital necessary for such purchases. This is where equipment finance agreements such as hire purchase, equipment leasing, finance leases, and operating leases come into play.
This is one of the most common way to purchase assets as it allows you have the asset and pay for it over time. Payments are made in instalments, which means it is a balance sheet item. The maintenance and insurance costs are also yours to bear as the asset is in your possession. You gain full ownership of the item when the payment term concludes.
In this agreement, a lender purchases an asset and leases it to you. This allows you immediate access to the asset while only requiring a fraction of the cost upfront. The fraction is usually the first month’s rent.
Leasing is beneficial as it allows for flexibility since you can typically renew your lease, end it, or purchase the item based on your company’s needs.
Finance Leases and Capital Leases
A finance or capital lease is the middle ground between equipment leasing and hire purchase. The lease here is more long term and usually carries on for most of an asset’s life.
While you have use of the asset and you pay for it over time, you do not own it and so it does not appear on your balance sheet. You could claim VAT and offset the rental costs against profit, which can be convenient in the area of taxation.
Operating Leases and Contract Hire
This is a more common form of equipment leasing. It Is a lease with an agreed term where maintenance is taken care of by the lessor. It doesn’t appear on your balance sheet just like finance leases and it’s cheaper since you don’t need to pay the full value of the item.
Secured Lending Against Existing Assets
This concept, known as asset refinancing secures a loan against assets that your company already owns such as vehicles, buildings, and equipment. Should you fail to keep up wit loan payments, the lender seizes the assets to cover what is owed.
As you are technically releasing cash from existing assets, the amount you can get is dependent on the value of the assets being used. This type of lending is sometimes used for consolidation of debt.
While some lenders only refinance assets in a single area, others finance anything that has a verifiable resale value. There are many asset financing products you can access but there are also restrictions such as the fact that the asset must be removable and critical to your operations.
How to Apply
Asset finance agreements are not usually very complex, however, some of the requirements are like those of traditional loans.
Before applying, get an idea of what you need and what you are trying to achieve. Once you have done this, ensure you decide what amount you can commit to and what term is convenient.
Ensure that you shop around for an alternative lender source that is legitimate and that is best able to offer what your business needs.
These agreements typically have prerequisites in the form of documentation, and it is up to you to ensure that you familiarise yourself with said requirements and that you meet them.
Some lenders provide online application methods and others require you to visit a building physically. Complete your application form correctly and ensure that you understand the terms before you sign any contract.
After the contract is signed, delivery of the items or cash is handled based on the lender’s agreement with you. After that, it is up to you to ensure that you meet your end of the agreement by making the requisite payments.
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