Could asset finance be an asset to your business?
At some some stage, most businesses need to make a step change to get to the next level, and this can often involve the purchase of significant assets, be they plant, equipment, a new IT or telephone system, a replacement van, etc. Finding a large one-off payment is no mean feat, which is why many turn to asset finance options, especially in the current climate where banks are somewhat reluctant to lend.
Asset finance however is a mystery to most small businesses; in fact a recent study by the Leasing Foundation Asset found that such non-bank finance can be beneficial for SMEs but take-up is low. The principal barriers identified were negative perceptions as the “last-resort finance option” – plus a general lack of awareness that these sources of finance exist. The industry recognises that it must do more to promote the value of leasing as alternative funding vs. traditional bank sources and communicate more effectively about the value and the roles its products play for SMEs at their many and varied stages of growth, business cycles and aspirations.
Generally, asset finance involves paying a regular charge for use of the asset over an agreed period of time thus avoiding the full cost of buying outright. The most common types of asset finance are leasing and hire purchase:
LEASING gives the customer access to new equipment by way of renting it for a contracted period without owning the asset at the end. The leasing company (lessor) buys and owns the equipment on behalf of the customer (lessee) and the latter pays a rental for the use of the equipment over a predetermined period. There are two main types of lease: Under a finance lease, the value of the asset appears on the lessee’s balance sheet and the rental payments pass through the profit and loss account. The full value of the equipment is repaid to the lessor, plus interest, over the lease period. An operating lease may be more appropriate if the customer does not need the equipment for its entire working life. Payments (again appearing in the P&L) are made to the lessor for the use of the equipment while it is needed. The leasing company may retain responsibility for maintenance and is likely to take the equipment back at the end of the lease period. As the customer only keeps the asset for a very limited period, it is not shown on the lessee’s balance sheet.
HIRE PURCHASE allows the customer to buy the equipment on credit. The finance company purchases the asset and owns it until the final instalment is paid, at which point the customer is given the option to buy it for a nominal sum.
Both options give the business access to critical equipment without the cash flow hit of an outright purchase and finance agreements can often be tailored to the business’ needs, with flexibility on both the term and repayment schedule. The schemes are also perfect for budgeting purposes as payments are usually fixed allowing improved cash flow management.
ASSET BASED LENDING (ABL) is any kind of lending secured by an asset, and in cases of default, means, the asset is taken by the finance company. ABL essentially unlocks funds in the balance sheet, where it is often tied up in specific assets such as Accounts Receivable and inventory, although machinery and buildings/warehouses can also be potentially offered as collateral to secure a credit line. HESE loans however are almost always used for short-term funding needs, such as covering wage bills or raw material purchases rather than capital equipment where leasing and hire purchase are usually the preferred route.
Check before you sign: Around 90% of asset finance providers in the UK are members of the Finance & Leasing Association (FLA) which gives peace of mind that you are dealing with a reputable firm whose agreements are subject to the FLA’s Business Code. Check the website at www.fla.org.uk. Note that the depreciation and tax treatment of the above options vary; contact the office for advice before you proceed.