Every small business, no matter the industry it operates in, has to have assets in order to function.
But with so many different finance options available to small business owners, choosing the right way to get hold of the assets you need to grow your business and get ahead of the competition can be a little easier said than done.
In this piece, we aim to dispel some of the myths and confusion around asset finance, explaining exactly what asset finance is and why you'd choose it over another popular finance option, the good old-fashioned business loan.
What is an Asset?
Simply put: pretty much everything.
An asset is anything a business owns that isn’t meant for sale or immediate use, which is intended to have some value for the future.
An asset can be as big as land, property or heavy machinery, but also as small as a desk, chair or filing cabinet.
The assets a business needs to run and compete do of course vary greatly depending on the type of business you run.
Some companies may, for example need more technical equipment like computers, printers and office equipment, which others may need to invest more heavily in catering-related assets such as refrigerators and ovens.
One thing which does remain constant however is the need to lean on a lender at some point in order to gain access to high-quality assets and not just survive as a business, but punch above your bank balance's weight.
The large, large majority of business owners in not just the UK but across the world, work closely with a trusted lender from year to year to continuously improve their business' offering.
But why choose an asset finance option over other forms of finance, such as a business loan?
Asset Finance vs Business Loans: Why Choose Asset Finance?
The majority of business owners go down the asset finance route for one, simple reason: cost.
Asset finance is cheaper 99.99% of the time because the security of the loan is in the asset rather than on you as a person, such as in your house or car.
In other words: if you can't afford to stump up the money for your asset any more, the asset itself will be seized, which is much less of a risk for any lender than lending against your home.
This smaller risk is reflected in the rate you'll be quoted, which, as we just mentioned, is 999 times out of a thousand a cheaper option for you than a business loan would be.
Types of Asset Finance
The first type of asset finance is known as Hire Purchase. It's one of the most common types of asset-based lending used today.
In a hire purchase agreement, you buy the asset, but you don't pay for it all at once.
Instead, you pay monthly for the asset, giving you instant access to a piece of equipment you may or may not have otherwise been able to afford.
As soon as the payments have all been made, ownership of the asset then rests with you.
These agreements last anywhere from one to six years. You're also expected to pay a deposit initially before the installments begin, and the responsibility for insurance costs and maintenance of the asset lies solely with you.
The next asset finance method is known as Equipment Leasing.
This method is used if you don’t wish to purchase the asset outright.
This is one of the most sought-after types of agreement for the simple reason that leasing equipment gives you immense flexibility.
Come the end of the agreement, you're given two options: to pay a small fee to purchase the same piece of equipment outright, or - and here's the desirable bit - to upgrade to a newer piece of equipment.
With technology moving as fast as it does these days and equipment becoming outdated faster than ever, leasing gives you the competitive advantage you need to constantly stay ahead of your competitors.
Outside of the business world, this is the exact same reason people have turned in their droves to car leasing rather than car ownership: at the end of a 5-year agreement, rather than owning a 5-year-old car outright which is depreciating in value, you simply trade the car in for a newer model at a similar rate.
The exact same is true of Leasing in the business world.
With a leasing agreement, you pay monthly installments during the period in which you use the asset.
Asset refinancing is another method you can use. This applies to assets that you already own and have capital tied up in. Here, a lender purchases your equipment and then leases it to you over an agreed time period.
Quick Asset Finance Facts
- Asset finance is a fast way to lease or purchase new assets, or to use existing ones to unlock cash.
- You can use hire purchase or leasing to get new assets for your business. Both involve installment payments; however, hire purchase allows you to gain ownership of these assets at the agreement’s end while leasing does not.
- Asset refinancing allows you to use existing equipment by selling to a lender, who then leases it back to you.
- Asset financing is a small business loan alternative. This allows you to get and use the equipment you need without having to pay the cost in full upfront.
- Ready to apply for asset finance? Click below to see how much you can borrow.