Asset Finance

One of the biggest problems with growing a business in the UK today is financing the larger purchases your business needs. Expansion demands that you invest in additional physical assets, whether that be the equipment used to do the work, company vehicles, additional infrastructure, or even simply the desks and chairs for people to sit at! 

What can you do if you simply do not have the capital to invest buying these assets? Are you forced to stagnate? 

The answer is no – thanks to asset finance.  

What is Asset Finance 

Asset finance is a way for businesses to obtain additional physical assets without having the capital on hand to pay for them, and without further borrowing. Its closest familiar cousin is car finance – and many aspects of asset finance follow a similar model. 

When your equipment or other assets are purchased with asset finance, you don’t actually own them (although the option to do so later does exist). Instead, you are leasing the assets from a financing company and pay a regular amount for their use. 

Asset finance allows you to keep your business ahead of the game, using the latest equipment without having to find the significant capital to buy it outright. 

How Asset Finance Can Help Your Business Grow 

Asset finance is an excellent way for smaller and medium-sized enterprises (SMEs) to grow their businesses as the following examples will show: 

TopNotch Software 

Doug runs TopNotch Software, a computer game development company. After a few years of making smaller mobile games, TopNotch are offered a contract to develop a AAA title for the Xbox. Doug leaps at the opportunity, keen to grow his company accordingly. However, there’s a problem – though the initial payment of the contract will give him enough capital to invest in the six new members of staff that the project requires, Doug won’t have any money left over to purchase the computer equipment the new employees will need to develop the software. 

Through operating lease asset financing, Doug is able to acquire six new computer setups – high-end machines that will enable his team to work at an optimum pace as well as the software and peripherals to go with them. Not only that, but Doug uses hire purchase asset finance to get desks and ergonomically designed chairs to ensure the best ongoing health for his staff. 

With a simple monthly payment, TopNotch is able to undertake the contract without putting undue pressure on the business and Doug has successfully expanded the company as he wanted. 

Sara’s Café 

Sara runs a small café in a little village. She has financed it all herself using her savings, which has enabled her to rent the building and fill it with tables and chairs. The kitchen is small but serviceable and fulfils all her health and safety obligations. Sara is a trained barista, but has been unable to invest in a quality espresso machine and can only offer filter coffee to customers. This has been a constant headache, as most customers are used to the wider offerings of the bigger coffee shops. Consequently, she is losing business. 

Sara applies for hire purchase asset finance to obtain a top-of-the-range espresso machine. Despite having no significant remaining capital, it takes her less than a week to get the machine and immediately her sales pick up. The increase in revenue from her specialist coffee pays the monthly leasing cost for her coffee machine many times over, generating significant profit and raising Sara’s profile for her café. 

At the end of the first year, Sara chooses to purchase the machine outright. 

The Different Types of Asset Finance 

Not all asset finance is the same. “Asset Finance” is an umbrella term for several different financing options, each designed to cater to slightly different needs. When choosing your asset finance, consider your particular requirements to ensure you get the best asset finance option for your business. 

Hire Purchase 

Hire purchase (HP) is good for those who are looking to own the asset at the end of the term, and need to offset payment. It is paid for in three stages: 

• An initial payment, sometimes called the ‘deposit’ 
• Small, regular, monthly payments 
• An optional final payment to clear the balance, known as the ‘balloon payment’ 

Hire purchase is quite flexible, as the decision at the end to pay the balloon payment is up to you. In this way, if your situation has changed between taking out the agreement and the contract ending, you can make the appropriate choice that works best for you at the time. 

Under hire purchase asset financing, you are responsible for the upkeep and maintenance of the asset throughout the term. 

Finance Leasing 

Finance leasing is another common asset finance option, especially if you are unsure whether you will want to keep the asset at the end of the term. With finance leasing, the finance company (the lessor) owns the asset and you (the lessee) pay a regular monthly amount over the length of the lease as rental. 

Depending on your finance lease contract, you may have several options at the end of the contract term: 

• Renew the lease – this would mean simply continuing for another term with a new lease on the same asset. 
• Purchase the asset – many finance lease contracts offer the option to buy the asset at the end of the term. 
• Upgrade the lease – this is essentially replacing the old lease with a new one, typically for a more up-to-date version of the same asset (for example, a computer or a vehicle). 
• Finish the lease – you return the asset and have no further obligation. 

Finance leasing is typically chosen for assets that depreciate over time and is often for a term that encompasses a significant portion of the assets useful lifespan. The monthly cost of the lease is calculated based on that depreciation, so objects that lose their value rapidly may have higher monthly payments. 

During the finance lease term, the insurance, maintenance, and upkeep of the asset is typically the responsibility of the lessee (you), however, the lessor retains ownership of the asset. 

Operating Lease 

An operating lease is similar to a finance lease but ownership of the asset remains with the lessor at all time. This means that upkeep of the asset is the lessor’s responsibility and there is no option for you to purchase the asset at the end of the term. Operating leases are similar in nature to property rental. 

Operating leases are typically used for high-value equipment where purchasing would be a significant financial burden, for example, specialist construction equipment or bespoke hospital machines, such as MRI scanners. 

The Pros and Cons of Asset Finance 

As has been discussed, asset finance enables business to expand and gain access to equipment and other assets that would otherwise be out of reach, however there are some considerations that may affect your decision to choose asset finance. 

Pros 

• Little to no capital investment – This significant benefit means that companies can use their working capital in other areas without tying it up for physical assets. Other areas of the business such as staffing, marketing, general operations, and other expansion areas are all still able to make use of the main capital. 
• Cash flow management – With a known monthly fee, asset finance enables businesses to take control of their cash flow easily and avoid unexpected costs. This is especially true with operating lease asset finance, where additional expenses such as insurance and equipment repairs remain the responsibility of the lessor. 
• Asset upgrading – If assets are purchased by the business rather than being leased then any new technology or other upgrades require an entire additional round of asset investment. Leasing allows for easy replacement of assets as superior new technology becomes available, helping businesses stay at the top of their game. 

• Access to better assets – While it may be possible for a business to expend capital purchasing assets, this often leads to accepting poorer quality or less advanced equipment than the premium options on the market. Asset financing opens up the options to allow businesses to afford the very latest developments. 
• Tax benefits – Businesses may be eligible for tax deductions when using asset finance. Depending on the type of asset finance, you may be entitled to capital allowances or other tax relief. The specifics on the exact nature of your tax allowances typically changes each year, so it is important to get advice from your accountant for complete up-to-date information on your particular asset financing. 

Cons 

• Greater overall cost – Choosing to finance your purchases in this way will incur interest, meaning the total your business pays for the asset will be higher than buying it outright. 
• Limited ownership – In many cases, you will not own the asset. Modifications and alterations may require agreement from the lessor or simply be impossible within the terms of the contract. Additionally, you may have contractual restrictions on its use. For example, you might have a vehicle you cannot take out of the country, or a computer that you cannot upgrade. 

• Insurance and maintenance obligations – You may have an insurance clause in your asset finance contract, meaning you must fully insure the asset at all times. This can be an extra cost (albeit a sensible one) that you could ignore if you owned the asset outright and needs to be factored into your budgeting. Additionally, you will have to keep the asset in a good working condition and must prioritise its maintenance. 
• Early termination fees – Should you wish to stop leasing the asset early, you may be subject to early termination fees. 
• Unexpected depreciation – The cost of asset financing and any final balloon payments are calculated based on the expected depreciation of the asset. You may find the value of your asset at the end of the term is lower than planned. 

Asset Finance vs. Business Loans 

Asset finance is typically seen as an alternative to business loans. In practical terms, there are obvious similarities as both spread the cost of asset-based investment over time. Still, there are differences that should be taken into account before considering which is best for you and your business. These include: 

• Credit history – Lenders will look at different criteria regarding your business’s credit history. Typically, a business loan would require a more substantial credit history. 
• Ease of application – Asset finance is generally easier and faster to arrange than a business loan. 
• Ownership – Taking out a standard business loan to purchase assets means the asset is fully owned by the company. 
• Flexibility – A business loan provides cash which may be seen as more flexible for the business overall. Asset financing is linked directly to the asset and is for that alone. 
• Upgrading – Assets purchased with a loan cannot easily be upgraded when newer models or improved technology exist. Assets obtained through asset financing are regularly replaced with the newest version. 

Asset Based Lending 

Bridging the gap between a standard business loan and the types of asset finance described in this guide is Asset Based Lending. In this, a loan is obtained using a business asset (or multiple assets) as collateral. For a full understanding look to our guide on Asset Based Lending.

Applying for Asset Finance with Cashflow Solutions 

At Cashflow Solutions, our expert advisors are on hand to help you get the asset finance your business needs to expand successfully. We can assist with multiple types of hire purchase and finance leasing options and will get you a decision rapidly, with arrangements typically finalised within one day of application.  

For more information, contact us today. 

Working in partnership with our lending partners backed by the British Business Bank to deploy funds to support business growth and working capital

• Our connections to funders are second to none.
• We will use our experience to select the right lender to approach on your behalf
• We conduct diligence on each application before it goes – we like to answer the lenders questions before they ask them.
• We will produce a short credit paper which will go alongside your application.
• We can produce the cashflow for you in a format that will be acceptable to the lender
• We will ensure that your application is supported by all the key documents needed – if you make it easy for the lender it will cut days off the process and increase your chances of approval.