What Is Asset Finance?


Asset finance is a potentially very useful option to consider when you’re looking for business finance.

Definitions

At ACF Direct we like to keep things simple and avoid jargon.

Sometimes though, to do so, it’s necessary to speak briefly about the meanings of words and expressions commonly encountered in finance.

In this context, “Asset Finance” is a very broad term that can mean one of two things:

  • Using various forms of funding in order to help you to secure major assets without needing to dig deep into your own liquid capital reserves;
  • Using your existing assets to raise capital for the acquisition of new assets (this should, more correctly, be called asset re-financing).

Let’s deal with the second of these to begin with, as it’s typically easier to briefly describe.

Asset Re-financing

If you’re trying to raise capital to support a new asset acquisition, your existing assets might be a good place to start.

This introduces the term ‘equity’, which basically means the sum that’s the difference between a realistic present-day market valuation of the asset and any outstanding debt you might have on it. So, if you have a machine valued at £50,000 and you still have £10,000 of the original loan to purchase it to pay off, then your equity in it is approximately £40,000.

Borrowing against the equity you have in an existing asset is a very useful technique and one that’s typically cost-effective. The assets concerned are usually things such as buildings or large plant but others things can be considered too at times.

Asset finance

This heading is a little more diverse and includes a number of different ways of raising finance for the procurement of major new assets. It includes various products and approaches including:

  • Equipment leasing
  • Hire purchase (the familiar “HP”)
  • Finance leases
  • Operating leases

Equipment leasing is typically straightforward. The lender will usually purchase the item and allow you to pay a monthly sum to use it.

This has the advantage of avoiding (typically) a large up-front deposit type payment though you may have to pay one month’s fees in advance. You won’t be locked into a confirmed purchase at the end, though that might be an option if you choose.

You will though usually be committed to a pre-defined leasing term by contract.

HP should require no explanation, due to its simplicity and cost-effectiveness. Essentially you become the ‘keeper’ or ‘agreed user’ of the item concerned but the finance company remains the legal owner.

At the end of the term, you become the owner and the asset becomes yours.

Finance and capital leases are a cross between HP and standard leasing. They work on a very similar basis but typically you don’t get to own the asset at the end though you can book the monthly costs to your P&L and reclaim VAT.

Operating leases (sometimes called “contract hire”) are different again. Here the lender will typically lease you back the item on a basis that means it doesn’t sit on your balance sheet and you may see some tax advantages as a result.

What’s suitable for you?

This is more complex than it sounds and to answer it requires an understanding of your business position.

For example, the differences between operating leases, finance leases and equipment leasing can be subtle and involve a large degree of consideration of your accounting preferences and views.

It would be much easier to discuss all these options with you in the context of your company’s actual situation. Why not contact us today to find out more?