What is asset finance?

Neil Davies

Asset finance is a flexible approach to funding that gives your business access to the equipment, vehicles, plant and technology it needs to perform, without compromising cash flow. 

Demystifying asset finance

I’ve been working in asset finance for so long now that I take it for granted that everyone knows what it is; yet, in our quarterly survey of 1,000 UK SMEs – which we call our ‘business barometer’ – the percentage of ‘yes’ responses to the question ‘have you heard of asset finance’, has remained stubbornly at around 40% - since 2013!

Asset finance is an alternative form of funding used by businesses to obtain the equipment they need to grow. In effect, it utilises the residual value in an asset to either pay for or put down a deposit on another piece of kit.

It usually involves paying a regular charge for use of the asset over an agreed period of time, avoiding the full cost of buying outright. Common examples of asset finance are leasing and hire purchase.

Leasing

Access to new equipment is effectively gained through renting it for a defined period from the leasing company, who own the equipment. The customer pays a rental for the use of the equipment over a predetermined period.

There are a number of types of lease but the main two are:

Finance lease

The full value of the equipment is repaid to the leasing company, plus interest, over the lease period. At the end of the term, the company 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

An operating lease may be more appropriate if a company does not need the equipment for its entire working life. The leasing company receives a rental payment from the user but normally this is less than the full cost of the equipment and the leasing company is likely to take the equipment back at the end of the lease period.

Hire Purchase (HP)

Most of us are familiar with hire purchase which allows the customer to buy the equipment on credit. The finance company owns the asset until the final instalment is paid, at which point the customer is given the option to buy it for a nominal sum.

Why use asset finance?

The beauty of asset finance is its flexibility – it can be used to fund any asset, ranging from printers and CNC machines to forklift trucks and aircraft.

It 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.

 

Neil Davies, CEO of Close Brothers Asset Finance and Leasing

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