What is asset finance?
Comparatively few companies have sufficient liquid capital to enable them to go out and purchase outright a major item of capital equipment. Even if they did, it might not be the most cost-efficient route to follow.
More commonly, they will seek some form of asset finance to assist.
Asset finance – explaining the usage
You may hear the term asset finance used to describe two very different things:
the provision of a loan or some other financial facility from a specialist provider, with the objective being that it permits the purchase of a major asset for a company;
the ability to borrow money against equity you may have in an existing asset. Note that while you may sometimes see the term used in this context, it is technically incorrect and possibly misleading. This should be more correctly called asset re-finance and it won’t be discussed further here.
What purchases are eligible
Different asset finance providers may have different definitions of acceptable purposes. Broadly speaking, this type of finance can be used to purchase anything such as commercial vehicles, plant and machinery, warehousing equipment and so on.
Commonly, companies offering assistance with asset finance will be looking to see if the thing you are considering purchasing meets some of the following criteria:
- it is substantial and would normally be entered into your asset register as a fixed asset under some form of recognisable depreciation model (though in fact, not all options make this necessary/possible);
- it typically will have a life expectancy of several years;
- it is something that will have a residual value over time, even if that reduces via depreciation. As such, it would be something quite different to, say, the purchase of consumables or other forms of standard business expense to be taken into your annual profit and loss statement.
If you speak to an experienced provider of asset finance, they will be able to outline their own definitions and there is likely to be one that is suitable for your particular circumstances.
The basic principles of asset finance
There are numerous asset finance solutions and some may be more suitable for your specific circumstances than others.
You may find that they will typically fall into one of the following generic categories:
- hire purchase (HP) type schemes. These are tried and tested and well understood by almost everyone. They usually entail the solutions provider purchasing the equipment and then allowing you to use it while you make monthly repayments to them against the sum advanced. Once you have made the final repayment, outright ownership of the asset transfers to you;
- various leasing schemes. These usually entail the solutions provider again purchasing the equipment and then leasing it to you in return for a monthly payment. Some schemes conclude with the item being returned to the solutions provider whilst others may allow you the option of purchasing it at the end of the term for a typically modest sum by way of a final balloon payment;
- capital loans. This means that you will be advanced a sum of money to purchase the capital item in your own name and will then repay the loan on a standard monthly basis. In some cases, the finance provider may require some form of legal charge over the item in order to protect their interests should you default on the loan.
Although recent changes in legislation have to some extent simplified the position, asset finance remains a complicated area from the point of view of taxation and standard accounting. The solutions you choose may affect, for example, things such as your gearing and assets versus liabilities picture.
It’s highly advisable to speak with a specialist provider of such finance to obtain advice and you should ensure that your own accountant is fully engaged in your selection of an option.