By Anton Nebbe, head of PR and communications at Close Brothers Asset Finance
ASSET finance is, for many firms in the plant and wider construction sector, a form of funding they have used for many years. Yet still, for others, it’s not something they know much about. In this article we take a closer look at the different products and understand why it could be the perfect option when considering your next purchase.
In short, asset finance is an alternative form of funding used by businesses to obtain the equipment they need to grow or access much-needed cash.
Asset finance makes the otherwise unaffordable affordable because it gives businesses access to the equipment they need without incurring the cash flow disadvantage of an outright purchase.
Agreements can also be customised to the business’s needs, with flexibility on both the term and repayment schedule.
There are various products that come under the broad umbrella of asset finance with one of the key ones being refinancing or capital release, as it’s also known; it’s a proven way to make your assets work for you and release cash back into the business.
It’s pretty straightforward and works by the finance company purchasing the asset and financing it back to you, with repayments calculated in line with the income the asset is expected to generate; at the end of the refinance term, you own the asset.
This offers several great benefits to a business that just needs a cash injection, whether it’s for investment in additional business critical assets or to use in other areas of the business, including unexpected bills and invoices, salaries, VAT payments, diversification – the uses are almost endless.
Funders can also look to take over a finance agreement with another provider and extend the term, ultimately reducing monthly payments and easing the pressure on cash flow.
Other examples of asset finance products are:
• Hire Purchase (HP) allows you to buy the equipment on credit. The finance company purchases the asset on your behalf and owns the asset until the final instalment is paid, at which point you are given the option to buy it.
• Finance lease: The full value of the equipment is repaid to the finance company, plus interest, over the lease period. At the end of the term, you can choose to continue to use the asset by entering a secondary rental period; sell the asset and keep a portion of the income from the sale; return it.
• Operating lease: Similar to a finance lease, an Operating Lease allows you to rent the asset from the asset funder while you need it. The key difference between the two is that an Operating Lease is only for part of the asset’s useful life. This means you pay a reduced rental because the cost is based on the difference between the asset’s original purchase price and its residual value at the end of the agreement.
