Business Asset Finance Explained

Conrad Ford

Written by Conrad Ford on March 5, 2019

Updated March 5, 2019

man explaining asset finance to business woman

According to LinkedIn, one of the biggest issues faced by companies starting out or looking to grow is financing, closely followed by cash flow. Financing is needed to purchase the supplies and buy-in the resources needed to get a business off the ground, while a strong and steady cash flow ensures it can keep operating.

Depending on your business, buying these supplies can be expensive; in fact, it could stop you from starting up at all if the costs are prohibitive. This is where business asset finance comes in because it allows companies to – in effect – lease or purchase equipment through monthly payments they couldn’t otherwise afford to buy outright.

What is covered by business asset finance?

Business asset finance covers pretty much any and every type of equipment you might need to start or grow a business including vehicles, IT (hardware and software), machinery, and construction and catering equipment.

If you aren’t sure if the equipment you are looking at is covered by business asset finance, put is to the DIMS test: ask yourself if it’s Durable, Identifiable, Moveable and Saleable. Remember, too, that equipment doesn’t need to be new; it can be second hand.

Different types of business asset finance

There are two main types of Business Asset Finance: leasing and hire purchase. Companies that own equipment but need to raise finances quickly could also look at asset refinancing.

Leasing

With leasing, you gain immediate access to the equipment you need, making monthly payments over the life of the contract, at the end of which you will need to return it. In effect, you are hiring the equipment for an agreed period of time and never own it.

There is a number of benefits when it comes to using business asset finance leasing:

  • You will generally not need to pay a deposit
  • You make regular monthly payments that won’t go up, meaning you can better manage your cash flow
  • You can often exchange your equipment before the end of your agreement, meaning you will always have the most up-to-date model; remember, however, this will likely mean extending your agreement and could mean an increase in the monthly cost.
  • Some, though not all, lease agreements come with the option to include equipment maintenance, which could save you money in the long-run.

There are also a number of disadvantages:

  • Your lease is for a set number of months or years (based on the cost of the equipment you are leasing). This means that if technology changes, it can be harder to upgrade – which could have an impact on business performance and productivity. Whether you can upgrade depends on the terms of your lease agreement, so make sure you understand these before signing.
  • You don’t own anything at the end of the lease, meaning you might be back at square one and needing to take out another business asset finance agreement despite what could have (potentially) being a significant financial outlay over a number of years.

Some lease agreements will offer you the chance to purchase the equipment at the end of the lease period. This will generally be in line with the equipment’s resale value but much lower than if you had purchased it new, meaning you may well have the cash needed to make the purchase and – finally – own the equipment you need to operate.

Hire Purchase

Like lease agreements, with hire purchase deals you make a regular monthly payment for an agreed period. Unlike leases, you end up owning the equipment at the end of your hire purchase agreement.

The benefits of a hire purchase agreement include:

  • Unlike loans, which you can also use to purchase equipment, hire purchase agreements are not normally secured against your assets, meaning they aren’t at risk if you don’t make payments (you simply have to return the equipment and pay any fees/charges associated with this).
  • Owning the equipment at the end of the agreement, meaning you can sell it on and use this money to reinvest in new equipment (if there was a new model on the market, for example); remember, however, that the equipment will be sold second hand so won’t be worth as much as you paid for it.
  • Finance charges on hire purchase equipment are generally tax deductible.
  • The downsides of buying equipment through a hire purchase agreement include:
    • Not being able to sell the equipment until the agreement has come to an end; which means you may be stuck with an older model that is less effective than new versions (impacting productivity and your bottom line).
    • Most require a deposit of up to 25% of the cost of the equipment, making it a more expensive proposition at the outset; if you are a start-up, it might be a struggle to come up with the deposit.
    • Because this is, in effect, a loan, you will be charged interest (which you aren’t on a lease), meaning the equipment will cost you more than it was actually worth.

    Because you end up owning the equipment at the end of your hire purchase agreement, your monthly payments may be higher than with a lease. This can be off-putting but needs to be weighed up against the benefit of not having to take out another business asset finance agreement in the future, which could have a positive impact on your bottom line.

Comments are closed.

Related guides

Business Loans For Non-Homeowners – What Are Your Options?

When you apply for a personal loan, one of the first questions lenders ask is ‘are you a homeowner?’. If the answer’s no, anything beyond a low-value, unsecured, personal loan may be beyond your reach. However, if you’re a business owner, the answer as to […]

Supply Chain Finance Explained

Small businesses often struggle with getting approved for finance and loans, especially if they are newly established. This is usually because they have not yet had the chance to build up their own credit score. Global supply chains stretch across the world, and companies are […]

Selective Invoice Finance Explained

According to research carried out by The Sage Group, 17% of invoices issued by small to medium-sized enterprises (SMEs) are paid late; 50% of those that receive late payments say it has an impact on their ability to operate effectively and can lead to their […]

Reasons To Use A Business Finance Broker

Financial products can be confusing, and as there are so many different options available, it isn’t always easy to know which is going to be best for you. It can be worthwhile to seek the help of an experienced professional who will have the knowledge, […]

We are independently reviewed by our verified customers and web users:
Rating: 4.6 / 5 with 29 votes

Lending Expert is a credit broker and comparison website, we're not a lender.

We bring together the very best financial providers and products from across the market place.

Warning: Late repayment can cause you serious money problems.
For help, go to moneyadviceservice.org.uk