One of the difficulties you can face when trying to raise finance for your business is knowing which type of product to choose. Ideally, you want a funding package that fits your business and gives you the level of finance you’re comfortable with servicing. Of all the funding solutions on the market today, asset finance remains a popular choice. But what is it and how exactly does asset finance work? Here, we have put together a brief guide for small business owners.
Asset finance in a nutshell
Asset finance is an umbrella term that covers a range of funding arrangements and is based on the value of your existing assets, such as machinery, vehicles, or equipment. In essence, you can leverage the value of these assets to release cash or to finance new assets that you need to grow your business. Now let’s take a look at some of the different products available.
Hire Purchase (HP)
With hire purchase, you can buy a new piece of equipment and spread the cost by paying equal monthly instalments over a fixed period of time. One advantage of HP is you don’t have to come up with a lump sum and at the end of the repayment term, the asset is yours. That said, because you pay interest on the loan, the item will cost more than the original ticket price. You’ll also have to bear the cost of maintenance, insurance and any repairs yourself over the course of the HP period.
Think of equipment leasing as an extended rental agreement for an item that you never own outright. You pay a monthly instalment over an agreed period and at the end of the term you can choose to extend it, renew the lease terms to buy some new equipment, or hand back the asset. With some leasing deals, you also have the option to buy the goods at the end of the fixed term. With a leasing agreement, all servicing and maintenance costs are usually covered by the lender.
Leasing can be a good option if you only want equipment for a short period and can also make it easier to upgrade to the latest equipment. For tax purposes, leased equipment is treated as an operating cost and can be written off against your gross profit.
Operating and finance leases
Equipment leasing often refers to an operating lease or a finance lease. An operating lease allows you to lease the equipment for a short period or, put another way, for a fraction of the asset’s useful life. This offers greater flexibility, especially for those business who want to upgrade equipment without having to first sell old assets before investing in new ones. Servicing and maintenance costs will usually be covered under the terms of an operating lease and you can account for the lease as an operating cost on your annual tax return.
A finance lease is similar to an HP agreement inasmuch as you are responsible for the upkeep of the asset without ever owning it. The other main feature of this product is that although you are in effect leasing a depreciating asset, you can show it as an operating cost on your company books for tax purposes.
Another option that may be worth considering is asset refinance where, instead of arranging finance to invest in a new asset, you use the equity tied up in your existing assets to release a cash sum. Basically, this mean putting up an asset as security against a cash loan and using the money to invest in new equipment. You may be able to raise as much as 75% of the value of a particular asset in this way. It’s important to note, however, that should you fail to meet your repayments on the loan, the lender is entitled to take ownership of your asset.
Seek professional advice
Before deciding which type of funding solution is best for you, talk through the tax implications of the different products with your accountant. It’s also worth shopping around for lenders who may specialise in arranging finance for your particular type of business or sector.