Asset finance explained

22nd August 2018 Business advice, General Nicola Roby

Obtaining finance for your small business is no longer just a case of approaching your bank manager and requesting a loan. The market is much more varied, and offers a vast range of products. One funding solution is asset finance. Nicola Roby from CHW Small Business Accountants in Bolton explains what it is and why it could be a suitable option for your business.

There are various finance solutions which fall within asset finance, so it’s important to understand what products are available and which would be best for you. Simply, asset finance relates to the physical assets of value in your business, which are likely to be commercial vehicles, heavy machinery, or equipment.

Asset finance comes in many shapes and sizes and deciding which one to go for will depend upon your requirements, circumstances and how well you meet the criteria of the various products and lenders.

Here is a brief overview of some of the main products available for purchasing an asset:

Hire purchase (HP)

HP essentially means purchasing an asset but spreading the cost over a set period of time – paying in monthly instalments rather than having to find a lump sum upfront.

Obviously, this comes at a cost and you will pay back more than the cost price of the asset.

After the repayment period comes to an end, you own the asset. Maintenance and insurance costs during the repayment period and after are your responsibility.

HP is a straightforward option for assets that you intend to keep for the long term, where you either can’t or don’t wish to stump up a lump sum in one go.

Items financed using HP will appear on your balance sheet as an asset.

Equipment leasing

This is where you essentially rent the item rather than buy it. You will pay a monthly amount to lease the asset without any of the responsibilities of ownership with servicing and maintenance generally covered by the terms of the lease.

At the end of the lease term, you can either:

• extend it
• begin a new agreement with an upgrade
• return the asset and end the contract

Sometimes there is the option to buy the asset, at a price which takes into consideration payments you have already made. You can often get finance to cover the final payment if needed.

Leased equipment is classed as an operating cost and is, therefore, written off against gross profit.

Equipment leasing typically refers to finance leases or operating leases:

Finance leases

With a finance lease you are leasing a depreciating asset for most of its useful life. It is similar to HP in that you take responsibility for ownership in terms of maintenance and servicing, but you will not own the equipment.

It will feel like HP in practice, but appears in your accounts as an operating cost instead of a depreciating asset on your balance sheet, which can provide a tax benefit.

Operating leases

With an operating lease you can lease the asset for a fraction of its useful life; essentially you are renting it. You don’t take on the responsibilities and risks of ownership and it also appears on your accounts as an operating cost.

This shorter term can offer more flexibility, especially if you only need the asset for a short period, or you want regular upgrades without the hassle of constantly buying and selling equipment.

Asset refinance

This involves using your existing assets to raise cash in the form of a loan, basically releasing the equity tied up in the asset and using the asset itself as security against that loan.

Typically, you can secure up to 75% of the value of the asset, depending on its depreciation, on the understanding that the lender will take the asset if you default on your loan.

Using an asset as security for a loan can improve your chances of getting funding.

Nicola says ‘As with all finance, you need to consider which product is most appropriate to your circumstances. With asset finance, this largely depends on how long you need the asset for, and the future plans for your business.

‘Whatever type of finance you decide upon it’s a good idea to discuss the tax implications with your accountant.’

For more advice on this or anything else to do with your small business finances contact the team here at CHW Small Business Accountants in Bolton on 01204 534031 or via our contact us page.

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