A Beginners Guide to Asset Finance
Posted on 20. Jan, 2011 by editor in News & Articles
Be it the need to replace old machinery to continue operating efficiently or indeed the need to purchase new equipment in order to expand, business owners should think carefully about the finance options available to them.
Here we look at how asset finance can really work for a business, and ask Neil Kimberley (pictured) and Tom Adams of Affinity Asset Finance Limited to explain the asset finance process and to discuss the advantages businesses will gain from considering this funding option.
Asset Finance – The Definition
Asset Finance is the use of credit or leasing facilities to finance the purchase of assets for a business.
Typical types of assets suitable for funding are:
- Cars, HGV’s & commercial vehicles
- Plant & machinery
- Agricultural equipment
- Buses & coaches
- Construction equipment
- Marine and aviation
- IT
Types of Asset Finance
Hire Purchase / Lease Purchase
This is the most popular and simple facility and the business own the asset at the end of the agreement. Typical terms are between 12 and 60 months and a deposit plus the VAT is payable up front.
Finance Lease
This is similar to Hire Purchase but the customer hires the equipment over a predetermined period which means they have the benefits of using the asset without the responsibility for disposal at the end of the agreement. Unlike Hire Purchase the VAT is paid on the rental payments rather than in a lump sum which assists with cash flow.
Contract Hire
Businesses can fix their monthly costs when it comes to running a car or van fleet. Contract Hire offers this benefit as everything except fuel and insurance costs is included during the period of hire.
Refinance / Equity Release
A business can refinance owned assets to release capital to purchase new assets or support cash flow. These facilities are typically classed as a ‘sale and HP back’ and work in the same way as a Hire Purchase facility with repayments being made over a fixed period.
What are the benefits of Asset Finance when compared to Bank borrowing?
Bank borrowing to finance assets takes up some of the credit available from your bank and will have an impact on the ability to extend an overdraft facility. In addition, by funding assets using a bank loan additional security such as a charge over freehold property may be required and the facility may be repayable on demand. The key benefit of an asset finance facility is that it is ‘stand alone’ and is linked directly to the asset purchase and is not repayable on demand.
What Lenders look for when considering an asset finance requirement?
In today’s economy lenders are more cautious than ever when agreeing funding but a professional intermediary like ourselves will assist every step of the way as we have the knowledge and expertise of how to package, underwrite and secure a facility for our customers.
Lenders will always look at the ‘affordability’ and the ‘security’ of the asset over time, in laymen’s terms, can the business repay the loan and what is the used value of the asset over time.
We’ve summarised below a simple list of questions you should consider when looking to secure asset funding:
- Will the payments be serviceable – either by existing sales or by an increase due to the investment in new assets.
- Does the asset retain a reasonable value over time – if this isn’t the case some lenders may want additional security via a charge over other assets or a Directors guarantee.
- Will the asset give you an additional income stream – i.e. will a new machine enable you to manufacture new products for sale.
- Are there any assets you own which can be refinanced?
Trends in the market place
The number of lenders providing asset finance has dropped significantly in the last few years, conversely it is more important than ever for businesses for preserve cash and fund assets rather than buying them outright.
As the economy recovers businesses will need to invest and replace assets to assist with growth and expansion plans and it is important to know that there is still a variety of lenders who have an appetite to provide this funding. Some of these lenders are only found via a financial intermediary hence their importance when looking at funding needs.
Indications are that customers are looking outside of their main bank and dealing with intermediaries who can secure facilities with lenders who specialise in the types of asset they are purchasing. Customers are also no longer wanting or able to ‘put all their eggs in one basket’ when it comes to their financial needs.
Benefits of using a Financial Intermediary
A financial intermediary puts the relationship back into relationship management. With their expertise and knowledge of the market place, speed of response and ability to meet and discuss requirements quickly we are seeing more and more customers turning to us. We are also seeing customers moving away from their current bankers due to a lack of appetite to provide funding. For example, if a business has an overdraft or invoice finance facility the ability to secure asset finance may be limited and that is where a financial intermediary like us plays a key part.
About Affinity Asset Finance Limited
Affinity Asset Finance Limited is an asset finance and commercial funding intermediary and is registered with the National Association of Commercial Funding Brokers.
Further details can be found at www.affinityassetfinance.co.uk
Contact Details:
Neil Kimberley T: 07540 051199 e: neil@affinityassetfinance.co.uk
Tom Adams T: 07540 051196 e: tom@affinityassetfinance.co.uk
