Asset finance and the different types of asset finance
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What is asset finance?
If you run a small business, you'll likely own – or will soon need to own – physical assets. Whether that's office equipment, heavy machinery or vehicles, these items can be essential for your business growth. And when it comes to purchasing them, asset finance can help.
So, what’s asset finance? Asset financing is the process of a company getting access to business assets without paying for them upfront. It's basically a loan used specifically to buy or lease the products you'll use in the running of your business. You can also take out a loan against assets you already own.
Typically, an asset finance loan is secured against a company's existing assets, meaning that the lender could repossess them if the company becomes unable to pay back any money owed.
Business owners often use asset financing to purchase or lease high-value items. Lenders may want to see that the item in question meets the DIMS criteria: is it durable, identifiable, moveable or saleable? They’ll also want to know whether the assets are hard or soft.
What's an asset?
Assets are the things your business owns that you won’t sell as products. An asset could be anything and depends on what type of business you have. It could be the computers, technology and equipment you have in your office. Or – if you own a small publishing company – it would be your printing machinery. If you own a catering company, your assets would include your ovens and refrigerators. If your business is a farm, then vehicles such as tractors could be your assets.
Hard assets include machinery, equipment, or even vehicles. Warehouses, buildings and other business premises also come under this category.
Soft assets are items seen as less durable and may have no saleable value at the end of the finance agreement. This includes CCTV, tills, security systems, or anything with a limited lifespan.
Who can use asset financing?
Every type of business can — even sole traders. Traditionally bigger businesses and corporations use it, but new minimum levels of finance have meant that smaller and medium-sized businesses are taking advantage of this type of borrowing too.
It's important to check each lender's acceptance criteria as many will only allow limited companies to apply. Asset financing can be a great option if you want to grow your business or invest in new machinery and equipment but don't have enough funds to hand.
The different types of asset finance
Asset-based finance refers to both leasing new assets and refinancing existing assets. Refinancing existing assets refers to what you do with the equipment you’ve already invested in. You would do this if you want to release some of the capital tied up in those assets by selling it to a lender who then leases it back to you.
The different types of asset finance are:
Hire purchase
This is a common type of asset-based lending. With a hire purchase, you can buy the asset and pay for it in instalments, so you can get the asset immediately, but spread the cost over time. Once you’ve completed all the payments, you’ll have full ownership of the item.
Hire purchase agreements generally last between one and six years. For this kind of asset lending, you would be expected to pay a deposit before the fixed monthly instalments. You’ll also be responsible for the maintenance and insurance costs of the asset.
Equipment leasing or equipment financing
If you don’t want to buy the asset, you can lease it from a lender and pay monthly instalments for the time you are using it. In this arrangement, you don’t come to own the item, but benefits include being able to have the item straight away and only needing a fraction of the total amount upfront.
At the end of the lease, you have several options. You can continue to lease the item, buy it outright at an agreed price, upgrade it, or return it if you no longer need it. One of the benefits of leasing equipment is you can be flexible about the arrangement, which is good if your business changes, or the assets you need or desire to change.
Asset refinancing
If you’ve already invested in equipment and you want to release some of the capital tied up in those assets then this kind of asset lending may be right for you. A lender buys your equipment and then leases it back to you over an agreed period.. You'll make regular payments spread across that period.
Finance leases and capital leases
A finance lease, also known as a capital lease, is a type of business asset finance that sits in between making a hire purchase and equipment leasing. It’s a longer-term lease for most of the asset’s life. You get full use of it and pay the full value for it over time, but don’t own it. So if you would prefer to pay smaller instalments over a longer period, then you may want to consider it.
Operating leases
This is similar to a regular finance lease, but the company that leases the item to you is responsible for maintenance costs.
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Alternatives to asset finance
Asset finance solutions can be a good alternative to traditional borrowing options. However, if you're looking for more flexibility when it comes to repayments, then you might want to consider an alternative option.
For example, our iwoca Flexi-Loan was designed to be fast and flexible with borrowing options from £1,000 up to £500,000. You’ll only pay interest for each day you have the funds and there are no early repayment fees. Plus, you aren’t limited to spending the funds on asset purchases only.
The pros and cons of asset financing
Advantages of asset finance
- Simple: typically you can obtain asset finance loans more easily than traditional bank loans
- Cost-effective: with fixed payments, you know exactly how much you have to pay each month and spreading the cost of an expensive item is often easier to manage than paying for something in one lump sum
- Fixed charges: most types of asset financing have fixed interest rates, making budgeting easy every month
- Capital: asset financing allows your business to avoid using capital to buy things, meaning it can be invested elsewhere in the business
- Risk-free: if you fail to pay, you'll lose the assets and nothing else
Disadvantages of asset finance
- Short-term: if you want long-term funding, asset financing usually isn't the right choice
- Value: the asset value of which the loan is secured against can be relatively low and can vary from lender to lender
- Damage: any damage that isn't covered under services or maintenance might not be covered in the agreement which means you would have to pay for it yourself
- Loss: if you don't pay, you could lose assets crucially important to your business
