Asset finance lets firm obtain business-critical assets or replace outdated equipment without impacting cashflow or raising working capital to make a purchase.
A flexible financial product, asset finance has several variations which can be employed to fund high price purchases, ranging from office IT equipment and fleet vehicles to heavy machinery for a manufacturing facility.
What are the different types of asset finance?
A valuable option for firms facing challenges acquiring essential equipment without the means to purchase it upfront, asset finance has several types.
Finance lease
A popular asset finance type, finance lease involves the lender purchasing the required asset and then leasing it to the business borrowing.
During the term of the lease, the business makes monthly repayments that cover the cost of the asset plus interest. The business leasing the asset is responsible for maintaining and insuring it. At the end of the term, the business can continue to rent the asset, return the asset or sell the asset on behalf of the lender.
Operating lease
Another type of asset finance, an operating lease lets firms secure equipment for a set period, with the flexibility of upgrading to an advanced model during the rental timeframe.
A key difference between operating and finance leases is that with an operating lease, the lender assumes responsibility for maintenance of the asset for the finance agreement’s duration.
Contract hire
A common finance solution for leasing company vehicles, contract hire is often selected by firms operating a fleet. Under contract hire, the lender sources and maintains the vehicles leased to make what can be a complicated process more streamlined.
During the arrangement, a firm has the flexibility to make payments over a prearranged lease term. This allows for planning a manageable and predictable budget.
Hire purchase
Hire purchase (HP) is a financing option that suits firms that wish to eventually own an asset outright. After all repayments are made, the asset leased is owned by the business.
While the firm leasing the asset can use it after they buy it, until they pay off the asset fully, ownership stays with the lender. During the repayment term the firm is responsible for the asset’s maintenance. Additionally, the asset cannot be sold until the term is completed.
What are the benefits of asset finance?
Asset finance has multiple business benefits, including small upfront costs, spreading payments and no extra collateral being required.
Small upfront costs
A key benefit of asset finance is the small to zero costs upfront to make a major asset purchase. This lets firms immediately benefit from equipment without having to secure sufficient capital for an outright purchase.
Spreading payments
Asset finance lets firms spread the cost of an expensive purchase over time, freeing up a firm’s capital and supporting cash flow.
No additional collateral
As the asset purchased acts as the security for the lender, no extra collateral is required. This is useful for newer businesses and those without assets.
What are the risks of asset finance?
As well as advantages, asset finance has some potential risks.
Ownership
As the lender owns the asset until the firm borrowing makes all repayments, they can put limits on the asset’s use. For instance, a lender may set a limit on vehicle mileage and enforce financial penalties if firms exceed agreed restrictions.
Damage
A firm can also be liable for damage to an asset if it exceeds what has been agreed in the finance contract while it is still under ownership of the lender.
Longer term
While there are exceptions to the rule, it is common for the full term of asset finance agreements to be at least one year. However, with other forms of asset financing, terms can potentially last even longer. This means that asset finance can represent a significant long-term financial commitment for a firm.
Defaulting
Firms that fail to keep up with their repayments or stay within the terms of their finance agreement can see their asset repossessed by the lender. Furthermore, defaulting on an agreement can have a negative impact on the company’s credit rating.
Is my business eligible for asset finance?
If your firm is looking to access asset finance, at AJL Finance, we’re here to help. To find out what types of asset finance are available for your business, complete the eligibility checker form that appears on every page of our website.
