Colin Swanston, Managing Director of the Transport Division, reports on the importance of asset based lending to the SME market.
The Finance and Leasing Association recently reported that its members provided £110 billion of new finance to UK businesses and households with over £30 billion of finance provided to the private and public sector. This financing accounted for almost 32% of UK investment in machinery, equipment and purchased software in the UK.
Despite these impressive numbers, many small business owners are still unaware of the benefits that a well-structured asset finance facility can bring to their business. The route to finance is still, for many, through traditional channels, when considering investing in new equipment. As mainstream sources move further away from the traditional overdraft facility, it is now more likely that any headroom in the overdraft facility will be used to pay overheads and suppliers rather than be tied up in capital equipment.
Asset finance – A fast growing finance option
Access to finance is a common challenge for SMEs who can see the potential to grow their business but don’t have enough working capital to pursue the opportunities.
A key benefit of asset finance is that it offers an effective solution to this problem by spreading the cost of an asset over its useful working life. A well-structured hire purchase or leasing facility gives a business access to the vehicles, machinery or technology solutions they need without compromising cash flow.
Repayments can be structured to take account of seasonal cash flow fluctuations and hire purchase charges, while leasing payments can be offset against pre-tax profits. Additionally, there are no restrictions in the choice of supplier, and asset finance can be used for both new and second hand assets.
Refinance for faster release of funds
Looking more closely at the various finance products, Sale and HP back is a quick way to release cash against existing assets. The funds released can be used to expand a business, settle outstanding bills or to fund a deposit on a new piece of equipment or even premises.
A business has uninterrupted use of the asset and repayments are matched with projected income stream. Sale and HP back can be used to release cash regardless of whether an asset is already owned or is on finance with a different lender.
Acquiring a business using asset finance
In today’s financial market it may not always be straightforward to secure mainstream bank funding to acquire a new business. However, if the target company has a good fixed asset base consisting of vehicles, plant or machinery it may be possible to re-finance the assets of the target company to fund the acquisition. Obviously, timing is of great importance but with both vendor and purchaser and their respective legal advisers working together, it can be a workable alternative where traditional bank funding may not be available.