Understanding and implementing asset financing is an essential step for businesses that want to grow and become more profitable over the long run.
But what is asset finance exactly, and how does it differ from traditional financing?
Let’s start with the basics.
If you are a business owner, you know that affordable assets and/or capital are essential for growth yet financial concerns are the number one reason why Brits won’t start their own companies. That’s where asset financing comes in.
Asset finance is a type of modern and flexible funding that allows businesses with poor cash flow to finance the purchase of an asset.
However, companies who need funds exclusively can also apply for asset-backed finance, thus borrowing money against their own assets.
Therefore, while asset financing and asset-backed funding are different types of financial services, they are still provided by the same types of asset finance institutions.
This type of funding considers any resource, property, or equipment to be an asset as long as it generates a positive economic value and can be liquidated, including but not limited to investments, inventory, buildings, vehicles, software, making it different from multi-asset investing.
Getting an asset finance or asset-backed loan is an effective short-term solution for businesses, sole traders, and enterprises that require fast capital for reasons such as:
Note: These loans are easier to get than traditional bank funding like an overdrafts since the lending institution can repossess the asset if the loanee cannot continue paying the loan.
UK citizens and businesses have access to various types of asset finance products, and while they all have their uses and drawbacks, they all follow the same principles:
This standard type of asset financing involves a lending institution purchasing the asset on behalf of a business, which can use, maintain, and insure it while paying it off. By doing so, the business spreads the asset’s cost over time, which still appears on the balance sheets. The loanee gets full ownership of the item once the final instalment is paid off.
Similar to hire purchase financing, equipment leasing allows a business to use an asset purchased by a lending institution. This type of asset financing is cheaper and more flexible as leasing agreements include lower fees, last as long as the business requires the item, and the asset can be bought outright at any time.
With operating contracts, businesses rent an asset for a shorter period of time, and the payments are lower since they are not based on the item’s total value. This type of asset finance leasing is perfect for businesses that need immediate access to a piece of equipment. Moreover, the item’s maintenance is handled by the lending company.
Also called a capital lease, this financial product combines hire purchase and equipment leasing. Essentially, while you pay for almost the entire value over time and get full usage of the asset, you do not technically own it, so you can use the profit to offset the rental costs and claim a VAT refund.
Already mentioned above as ‘asset-backed financing’, this type of funding allows businesses to release some of the capital tied up in assets they already own. So instead of getting a typical loan where a bank judges the loanee’s creditworthiness, it estimates the value of the assets and creates a corresponding loan size.
Getting an asset finance loan in the UK has its perks, but it still might not be the right choice for specific borrowers. Below we look at the pros and cons of asset financing:
|Easier and faster to get than bank loans|
Available at fixed interest rates and fixed payments
Failure to pay results in loss of assets only
|You might lose important assets needed to run the business|
The assets against which the loan is secured may be undervalued
Ineffective for procuring long-term funding
So, what is asset finance? In short, it’s a quick and easy funding solution available to businesses that require fast cash for a variety of purposes. We hope this brief guide on asset finance explained its benefits as most businesses can utilise this type of loan to meet their short-term goals. Ultimately, even if you default, you only lose the asset.
My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.