Definition of Asset Finance

Asset finance is a type of lending used by businesses to gain access to hard assets such as machinery, vehicles, and equipment, and soft business assets such as software, office fittings, and training. It spreads the cost of acquiring such assets, giving you access to new kit when you need it.

A benefit is that the profit gained by your business whilst using the asset may offset the monthly cost! It can also enable businesses to release cash from the value of assets they already own.  Another benefit is Asset Finance is 100% Tax deductible.  

How Asset Finance works

Asset Finance is a commercial arrangement where the customer will select an asset, the finance company will purchase that asset and the customer will have use of that asset during the lease. The customer simply pays a series of installments for the use of the asset for the duration of the agreement. What happens at the end depends on the type of the agreement, we will cover that in more detail a bit further on. 

What is an Asset Finance Broker?

An Asset Finance Broker works closely with the customer to understand their business and requirements. They provide advice and guidance on the most appropriate method of funding and find the best rates available for the business. They are essentially a bridge between the customer and multiple funders, meaning the customer can sit back and relax in the knowledge that their Broker is getting them the best deal. Reality Finance is a broker with a difference; we are also a Lender in our own right. This means we can often provide funding for our customers in situations when other banks and lenders are unable to.

How to get financing for a business

The first thing you need to establish before approaching a broker or lender is the equipment or asset your business requires and its rough value. This could be in the form of a quote from a supplier. Once you have this information you will generally find that the most beneficial route is to speak to a Broker.

Traditionally, businesses have approached their principal bank and then only approached a Broker if their application is rejected or if the rate offered is high. By speaking to a Broker in the first instance you can compare quotes from multiple funders, and know that your Broker is working hard to get you the most appropriate deal and type of funding for your business.

Why Lease?

Leasing helps businesses keep ahead of the game by giving them access to emerging technology and equipment to maintain their competitive edge. Businesses can quickly gain up-to-date equipment whilst spreading the cost, meaning they can retain their capital to invest in other areas of the business. Leasing also helps businesses to manage their cash flow, forecast and plan ahead. Equally, Leasing can provide a safety net if business critical equipment needs replacing quickly. For example, if a caterer’s oven was to break, they would be able to replace it quickly and continue business as usual.

Can second-hand equipment be financed?

Yes, businesses can acquire second-hand assets such as refurbished equipment using a finance agreement. Different lenders have different terms for these agreements, meaning that working with an experienced broker will save you time as they will only speak with appropriate lenders.

Hard vs Soft Assets

What is a Hard Asset?

A Hard Asset is defined as a tangible item, such as a vehicle, that has a resale value at the end of the agreed term.

What is Hard Asset Finance?

Hard Asset Finance is an agreement between a customer and a lender. The lender pays for the asset in full so that the customer can spread the cost of repayments over up to ten years depending on the asset and its value. The exact terms of the agreement depend on the type of funding. These are explained a little further on.

Hard Asset examples would include

• Machinerys
• Plant
• Manufacturing equipment
• Vehicles
• IT Hardware

What is a Soft Asset?

Soft Assets are differentiated from Hard Assets because they are often intangible and have little or no resale value; a good example of this is software.

Soft assets can also include items such as paint, office chairs, fixtures, and fittings for projects such as refurbishments.

What is Soft Asset Finance?

Soft Asset Finance is similar to Hard Asset Finance in that the bank or funder purchases the items required by the customer who then pays the bank or funder in fixed installments over an agreed term.  This type of finance often relates to the IT industry and project costs including:

• Software licenses
• Implementation costs
• Services
• Consultancy
• Project Management

Types of Asset Finance

What is Hire Purchase?

This is legally an agreement to hire with the option to purchase at the end of the agreement. Spread the cost of a purchase over time by paying in installments. The item appears on your company balance sheet and you are immediately responsible for maintenance and insurance costs. At the end of the purchase agreement, your business owns the asset.

What is a Finance Lease?

A Finance Lease allows businesses to spread the cost of the full value of the asset over time, giving full use of the item without technically owning it.

What is Vehicle Contract Hire?

With Contract Hire, businesses can enjoy full use of the asset over the hire agreement without the responsibility of ownership. Simply return the asset at the end of the agreement. This is a popular choice for vehicles.

What is an Unsecured Business Loan?

An Unsecured Business Loan agreement doesn’t require Assets because they are based on the creditworthiness of the business. Most banks prefer secure loans where an Asset itself can act as security. This is a quick and simple service with decisions typically made within 24 hours of application. Repay in fixed monthly payments over 6 months to 5 years.

What is a Working Capital Loan?

Working Capital Loans are used to finance a company's short-term day-to-day requirements. They are designed to inject cash into the business to enable it to make quick changes, such as going after new opportunities, employing extra staff for expansion or buying stock. Working Capital Loans are not generally used to purchase assets for long-term investments. They can help businesses grow quickly and/or manage their cash flow.

Knowing which finance option is best for your business and the asset you are looking to fund can be a daunting task.  To help with the decision, we've put together this simple comparison which summarises the main differences between finance options: