This is a type of finance provided to businesses to acquire the machinery and equipment necessary for their growth. It involves paying a regular fee to the lender for the duration of time the asset will be used. Therefore the borrower avoids the entire cost of purchasing the asset outright.
Asset finance can provide funding solutions for the acquisition of business assets such as:
- Vehicles
- Photocopier and telephones
- IT Software and Hardware
- Plant Machinery
- On site equipment
There are two common types of asset finance namely:
- Hire purchase
- Leasing
Hire Purchase and How It Works
Hire purchase is an easy way to buy an asset on credit and pay the cost over time. The Lender buys the asset and avails it to the borrower. The Lender has ownership of the asset until the final installment is paid. The customer then has the option to purchase the asset for a nominal fee.
Leasing and How It Works
Leasing operates on the basis of equipment being rented out to a borrower for a pre-determined period. Ownership of the equipment is retained by the lender ( also called the lessor) on behalf of the borrower (also called the lessee). The lessee pays a rental fee for use of the equipment during the contracted period.
There are two main forms of lease:
- Finance Lease: This is also known as a capital lease. The lessee gets to use the asset and pays the entire value over the prescribed time period. However, he does not have ownership rights, therefore it does not appear on his balance sheet. The business is able to counterbalance rental expenses against the profit made and claim Value Added Tax (VAT).
- Operating Lease: This is a rental agreement with a fixed term. Maintenance is usually handled by the leasing entity. Once the lease has run its course, the lessor may take back the equipment. The asset does not appear in the lessee’s balance sheet. This is because it is a temporary asset.
How Can Asset Finance Help A Business
Asset finance can help a business to access the equipment they need without disrupting their cash flow which would be the case if they made an outright purchase. Usually, the agreements can be drafted to suit the business’ needs and offer flexible repayment terms. Hire Purchase and Leasing are good budgeting tools, since the fixed payments are excellent for cash flow management.
Common Requirements For Asset Financing
Asset finance lending companies usually require the following documents to be presented by businesses seeking financing:
- Certified copies of articles of association and memorandum of understanding
- Written resolution by board authorizing the borrowing
- Certificate of incorporation (a certified copy)
- Most recent annual returns
Certain lenders focus on specific areas of asset finance whereas others can finance any asset with resale value. There are many asset finance products available for businesses with flexible terms of repayment. That said, there are some restrictions. For instance, the asset has to be vital to the business operations. The asset must also be removable to qualify as a security for a loan.
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