Asset finance is a funding method used by people or businesses to acquire assets. It is usually in the form of a loan. Asset finance is especially useful for small enterprises trying to get equipment that is too costly to buy all at once but require the equipment for their growth.
Asset finance can also be used by individuals who require to purchase items but cannot afford to get the items all at once. This can be used to purchase items such as cars, furniture and such.
An asset is an item of value. Assets can be classified according to:
- Their convertibility to cash: According to this classification, total assets are classified either into Current Assets or Fixed Assets. Current Assets are easily convertible into cash while fixed assets are not readily convertible into cash.
- Their physical existence: With this classification, assets are grouped according to their physical existence. That is, it can be either a tangible asset or intangible asset. Tangible assets are those assets which we can touch, see and feel while intangible assets are that cannot be seen, felt or touched physically by us.
- Their usage: According to this classification, assets are either operating or non-operating. Operating assets are required for the current day-to-day transaction of business while non-operating assets are not used for daily business operations but are essential for the establishment of business and for its future needs.
Types of Asset Finance
Hire Purchase
This option allows a company to acquire assets they need. The lender shall then purchase equipment on behalf of the borrower and then lease it to them. The Lessor (Lender) has ownership of the item until the payments are completed whereupon the Lessee (Borrower) is given the opportunity to buy the asset for a nominal fee. For business ventures, during the duration of the agreement the the asset appears on the balance sheet of the Lessee.
Finance Lease
This facility sees the Lessee take ownership of all the obligations and rights of an asset. During the period of agreement the Lesee must maintain and insure the asset. A monthly rental will be provided by the financing company and spread over the lease term period.
Operating Lease
This option is available if the Lessee does not require the equipment for its whole shelf life. The Lessor will take back ownership of the asset at the conclusion of the agreement. For businesses, since the asset is only retained for a nominal period it does not appear in the Lessee balance sheet.
Importance of Asset Finance
- Allows for cash flow forecast: Asset finance allows you to make regular payments that are spread out over a period of time. It thus allows you to forecast your cash flow better. You can also determine the correlation between revenue brought in by the asset and the repayment costs.
- Enables effective budget management: Paying a fixed amount over a period of time enhances planning and reporting thus making budgeting easier.
- It offers additional financing options: Extra lines of credit are available to a company without affecting their pre-existing financing arrangements.
- Qualifies one for lease bonuses: Certain leases can include special arrangements such as variable payments or servicing equipment.
- Allows access to new machinery: Companies are able to acquire new equipment that could otherwise prove too expensive for purchase.
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