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If you need to buy items that you’ll keep in your business (‘assets’, which could include computers, machinery, and furniture), asset finance can help you fund the purchase.
These items are often expensive, making them difficult to buy outright. Asset finance usually works like a loan, helping you buy the products over a longer period of time, or giving you the option to simply lease them.
Assets are valuable items that your business owns. Assets include cash, investments, and equipment. They’re not items that you sell to customers.
Many businesses rely on physical assets like vehicles and machinery to operate. But if you need to buy equipment to get going (or to replace existing items), it can cost lots of money.
Asset finance helps you raise funds, whether it’s to buy (or replace) assets or to release capital on existing assets.
One type of asset finance gives you the ability to buy an item by making repayments over a longer period of time, rather than paying for it outright.
Other forms of asset finance might just lease you the items, or give you the option to refinance existing assets (unlocking money that you can invest in other areas of your business). We explain more about the different types below.
Hire purchase gives you access to assets without paying for them upfront. You effectively ‘hire’ the asset from the lender then make the agreed monthly repayments. At the end of the term, you own the asset.
You can choose the length of the term, which usually lasts between one and six years. There can be fees to pay both at the start of the term (for example, a deposit) and at the end (to secure the asset).
If you default on payments, you may lose the asset.
Finance leasing doesn’t give you the option to own the asset. Instead, you rent the asset from the finance provider, making agreed payments – usually until the provider has made the money to cover the cost of buying the asset.
If the provider sells the asset at the end of the term, they might give you a percentage of the sale value.
Like finance leasing, equipment leasing lets you rent the asset from the finance provider and make agreed payments.
But at the end of the term, you have different options. You could continue to lease the item, or buy the asset. You might want to upgrade the asset and continue to make payments, or just return it to the provider.
A benefit of equipment leasing is that maintaining and servicing the asset is often down to the provider, not you as the renter.
You also won't be stuck with out of date equipment, as you can upgrade by leasing a newer model after the initial term.
Another form of equipment leasing is operating leasing, which is usually used for specialist machinery or equipment that businesses only need for the short term.
Asset refinancing uses your existing assets to unlock funding.
One way this works is by using your assets as security against a loan, meaning you might lose the assets if you default on your repayments.
Another form of asset refinancing involves you selling an asset to the finance provider, which they then lease back to you. You make repayments over a set term.
You can use asset refinancing even if you don’t own assets outright, but you can only access up to the level of equity tied up in the item.
So if you’ve got an asset that you don't own (for example, under a hire purchase agreement) and you’ve repaid £10,000 of the £12,000 term, you could get asset finance valued at the £10,000 equity (with around 70 per cent of that amount available to borrow typically).
Contract hire providers lease vehicles to businesses, who make the agreed repayments over a term.
You don’t get the option to own the vehicles. Maintenance and servicing rests with the contract hire provider, which can save you time and money.
Asset finance providers use the ‘DIMS’ concept to work out which assets to finance. This means they need to be:
Assets are also split into hard assets and soft assets.
Hard assets include plant, machinery, equipment, and vehicles. They will fit the DIMS criteria above and are most commonly used in asset finance agreements.
Soft assets, on the other hand, still fit into the DIMS criteria but their lifespan is more limited. They include software packages, furniture, and electronics (like CCTV systems or cash registers). Soft asset finance providers do exist, but can be more difficult to find.
Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.
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