The term “Asset Finance” is widely used in the business world.
What Is Asset Finance?
In the correct sense, this term describes ways in which you can gain access to the assets your business needs, without needing to find lots of cash from your own reserves to buy them.
It typically incorporates two methods of doing so:
- hire purchase (commonly just called “HP”);
- leasing (this breaks down into different options, as outlined below).
At times, in response to the question, “what is asset finance?” you may hear the term “Asset Financing” used to describe ways of gaining access to equity you might have tied up in some of your existing assets.
This should more correctly be referred to as “Asset Re-Financing” and we won’t be discussing it any further in what follows. If you’d like to know more about this potential option, please contact ACF Direct and we’ll expand on it further.
Understanding An Asset
The assets of a business or even a private individual are usually regarded as physical things that have an initial and ongoing value.
There are also what’re called “intangible assets”, which are not physical, such as trademarks or brand name ownership. We’ll be ignoring those here too – but don’t hesitate to call us if you would like to know more.
For most of us, assets are real things we use and can use again without them getting used up. They also tend to be of higher value.
So, a business’s fork lift truck is one of its assets, as would be its company vehicles, its PCs and some of its plant and machinery. Some things are typically not regarded as assets:
- consumables – such as stationary or fuel;
- low value items – office teacups, plant pots, coat stands, rubber mats or items that have a low life expectancy etc.
Assets Affect Your Accounting
When you acquire the use of an asset, you might do so in one of two ways:
- so that as it adds to the value of your company in the longer terms, by sitting on your balance sheet;
- it is seen as a business expense, the ongoing cost of which is entered into your Profit and Loss account (P&L).
How you choose to access and therefore account for your assets, is something for you to decide perhaps with the assistance of an accountant.
HP is perhaps the best known form of Asset Finance.
It operates on a simple basis:
- you sign an agreement, with a funds provider, to purchase the asset over time;
- the funds provider purchases the item;
- you will need to find a deposit as part of the purchase – typically that’s around 10% in the case of vehicles;
- you are allowed to use it in return for a monthly repayment over an agreed period;
- once the last payment is made, you will own the item.
Typically, HP requires the asset to be entered into your balance sheet in its net value and your debt to the finance provider becomes a liability (including interest).
Leasing – Finance
- the funds provider purchases the asset;
- you typically do not promise to purchase it from them but you do commit to renting it for a set period of time;
- you’ll pay them monthly to use the asset.
Assets accessed like this are typically also added to your balance sheet.
Leasing – Operating
This is similar to the above except you’ll typically pay monthly amounts to use the asset only for a period of time that is less than would be required to pay for it entirely.
At that point, the asset will be returned to the owner (the funds provider).
This is typically a shorter-term arrangement and the monthly costs are simply taken as a business expense into your P&L subject to Auditor Approval.
Why not call us for a further discussion? These things are sometimes more easily explained in a discussion than in a blog of this nature!