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Is Asset Finance Suitable For My Business?

Obtaining and deploying asset finance can be essential for business success. The following material aims to explain some of the ways in which your business can obtain fast access to assets.

How to Fund an Asset

There are two main methods of funding an asset to support your business operations:

  1. You can purchase the asset immediately from your own reserves, if you have the sufficient funds to do so
  2. You can enter into another form of funding mechanism – this is typically referred to as “asset finance”

Outright Purchase

If you have the funds readily available, you may naturally gravitate towards the idea of purchasing the asset outright. You may not want to consider any alternative forms of finance if you are confident in your capital reserves.

However, the fact that the money is immediately gone means that you may not have the funds available to deal with any emergency shortages, should they occur. It may be more sensible to bank your reserves and consider other asset funding mechanisms.

What is Asset Finance?

Asset Finance is a type of financing utilised by businesses in order to finance equipment, machinery, vehicles and other large assets, without having to pay the upfront cost of the object. Asset financing offers flexibility and minimises ownership risk. There are several different financial methods to help you finance the asset, such as hire purchase or leasing. But please note that these methods are subject to terms and conditions and the status of the company applying for the finance.

Hire Purchase

With a hire purchase, you are required to provide a percentage of the total cost of the asset from your own finances. This is often referred to as a deposit. The finance provider will then provide the balance and purchase the asset in their own name, allowing you to utilise it. You will be required to make regular monthly repayments, which will cover the cost sum of the object. One of the benefits to a hire purchase is that there is some flexibility in terms of structuring your repayments to suit your cash flow – but please check this with the finance provider beforehand.

For the duration of the agreement, you capitalise the asset on your balance sheet. You can sell the asset, but the proceeds of the sale plus any other monies required to meet the level of the settlement figure must be met on behalf of the legal owner. However, when the final repayment has been made, the asset then legally becomes yours and you take ultimate ownership.

Operating Lease

An operating lease is similar to renting, allowing you to gain access to the asset and utilise it for several years whilst making monthly repayments. At the end of the lease agreement, you are required to return the object to the provider. The monthly costs are an entry in your standard profit and loss accounting and may be treated as an “off balance sheet”.

Unlike with finance leasing, the rentals will not cover the full cost of the asset.

Finance Lease

A finance lease is a method that sits somewhere in between a hire purchase and operating lease. It is a longer-term lease, which requires you to make monthly repayments which will eventually cover the full value of the asset.

At the end of the lease agreement, you will generally have three options. Firstly, you can enter into a peppercorn rental, which means you can continue to use the goods and will typically be required to pay one month’s rental value annually. Secondly, you have the option to sell the goods, and will typically retain around 95% of the total sum. Finally, you can choose to return the goods to the provider.

If you are interested in Asset Finance, please get in touch with us here at ACF Direct. We can provide you with help and advice and will work with you to get the ball rolling on your finance agreement.