If you’d like to grow your business but don’t have the money needed to scale your operations, asset finance can be one way to raise funds. It enables you to spread the cost of equipment, machinery and other assets you need to expand. In this guide, we unpick your different asset finance options.
What is asset finance?
Asset finance is a way of leasing equipment, machinery, vehicles or other assets you need to scale your output. If you don’t have the cash to buy these assets outright, you can pay for them in fixed instalments over a set amount of time, usually with the option to purchase them at the end of the contract.
There is also something called asset refinance, where you use assets your business owns as security against a loan.
How does asset finance work?
Here’s an example. Ian runs a successful bakery. He would like to start supplying to nearby cafes, so to earn more dough he needs to… bake more dough. His current ovens are only just big enough to fit all his currant buns, so he needs a new one. But Ian can’t afford to buy one outright at the moment, so he arranges asset finance to pay for the oven in monthly instalments, with some added interest.
In short, it’s very much like the finance deals available when people buy a car. The only real difference is that in this case it’s a business asset, so you can claim allowances for it, and it also has the potential to increase business growth. If Ian’s plans are successful, his new oven should end up more than paying for itself, because his business will expand as a result.
Once Ian’s bakery is earning additional income from the cafes he supplies, he can decide whether to extend the lease or pay an additional sum to buy the equipment. However, if the expansion plan doesn’t pay off, Ian can simply give the oven back and stop paying for it. It’s worth looking for plans that offer this kind of flexibility.
What are the different types of asset finance?
There are a number of agreements available for spreading the cost of your equipment. Here’s a quick overview.
This is very similar to the hire purchase agreements for financing a car. You pay a chunk at the start of the agreement followed by smaller payments. You’ll be responsible for upkeep of the asset during the contract. Once the agreement ends, you can choose to pay a ‘balloon’ payment to buy the asset outright or hand it back and walk away.
With this agreement, you don’t have the option to buy the asset at the end of the contract. Instead, the lender buys the equipment and is responsible for its maintenance, and you rent it off them.
This contract is similar to a finance lease, but it is more flexible. You hire the item from the lender, but at the end of the agreement you can choose to extend the contract, upgrade the asset, buy it for a balloon payment or hand it back.
You also hire the item with this contract, but the payments are based on the value of the item during the time you’re using it, rather than its total value. It is designed for businesses that don’t intend to buy the equipment and only need it for a known amount of time, usually short-term.
This funding is similar to a secured loan, but you only partially own the item. When you are buying an item over a series of payments, you will build up equity as you pay off the outstanding balance. Asset refinancing lets you use this equity as security against a loan.
What kind of items can you get through asset finance?
You can use asset finance to loan or purchase ‘hard’ or ‘soft’ items. Hard items are physical assets like machinery, vehicles and equipment that can be resold at a high value. However, soft items such as software, CCTV and tills will lose their value after use and may be more difficult or even impossible to resell.
Some lenders use the ‘DIMS’ criteria to determine whether they can finance an item, meaning it needs to be durable, identifiable, moveable and saleable.
What are the advantages of asset finance?
- Scale up immediately – Asset finance lets you use or buy the equipment you need to scale before having to save up for it.
- Fixed payments – You’ll know exactly what you’re paying each month, making it easy to budget.
- Flexibility – Depending on the agreement you choose, you often have a few options at the end of the contract.
- Less responsibility – If you hire the equipment, the provider is responsible for maintenance costs – though you will be liable for damage and might need to take out business insurance. Plus, they have to bear the costs of value depreciation.
What are the disadvantages of asset finance?
- Interest – You will be charged interest, but the rate is generally fixed.
- Approval – Your business will need to pass the lender’s criteria to take out the finance.
- You may never own the item – It might not make financial sense to pay for an item that doesn’t become a business asset.
- Potential for disruption – If you can’t meet the payments, you might have to return the item, which could seriously harm your operations.
What kind of interest rate would I pay on asset finance?
Interest rates on asset finance vary. They can be as low as 2% or as high as 9%. Check with your accountant that the overall cost over the lifetime of the items makes sense from a business point of view.
What is the Annual Investment Allowance for asset finance?
The government allows you to remove the cost of your asset from your profit to offset your tax bill. You can now claim tax relief on assets up to £1 million.
What are the alternatives to asset finance?
You could also use a business loan to finance the item. This option might suit you better if you want to use the item for a short time before selling it on.
Your accountant can help you weigh up which kind of funding is right for your business and your objectives.