Paying for assets and equipment can drain any business of its finances. Business assets cost a lot, and small businesses need to get a loan to be able to pay for them upfront at once. However, a business without a good credit rating isn’t easily able to get a loan from big banks, making purchasing equipment challenging. This is where asset finance comes into play.
Asset finance is an arrangement between the seller of an asset and the buyer, which lets the buyer pay for items over time. It can be used for purchasing high-value assets such as cars, equipment, software, and machinery without affecting the business’s cash flow.
Here’s a detailed guide on asset financing for new business owners.
How Does Asset Financing Work?
Other business loans involve the borrower or the business taking money from the lender, repaying later as a whole amount or in installments. However, asset financing works differently. The third-party funder purchases the equipment and leases it to the business. This means that businesses make regular payments over fixed periods instead of making a one-time payment for the item until they own it outright.
When using asset financing, you can get it through a financial provider, manufacturer, broker, or equipment provider. The financial company owns the equipment and then leases it to your business. You’ll then make the agreed payments to the finance company until you own the machinery. For example, using Finstead business financing gives you access to lenders buying power to get assets such as yellow equipment, cars, trucks, boats, and even aircraft.
Types Of Asset Financing
Asset financing comes in six different forms, as explained below:
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Contract Hire / Vehicle Asset Finance
This financing option involves leasing a car or van for an agreed period. It mainly involves company cars, where a lender purchases the car that your business needs. Once the contract term is complete, you can either return the vehicle or extend it by paying additional amounts. The responsibility for the car, such as maintenance, services, and disposal, lies with the lender.
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Equipment Leasing
This involves leasing equipment such as software, machinery, computer systems, or even furniture. The lender purchases the equipment and then leases it out to your business. This type of financing usually has a shallow deposit requirement and flexible payment plans, making it an attractive option for businesses. Just like in contract hire, the responsibility for the equipment lies with the lender.
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Operating Leases
Also known as fair value leases or rental agreements, operating lease arrangements involve entering a rental contract with a lender to use their asset for a predetermined period over fixed payments. It is usually less costly than equipment leasing, as you only pay for a calculated value of the equipment.
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Hire Purchase
This type of financing is slightly different from leasing, as it involves buying the asset in installments. It’s a long-term arrangement between the lender and the business that stretches over two or more years. The business will make periodic payments until they own the item. Unlike in leasing, the responsibility of the asset lies with the borrower.
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Finance Lease / Capital Lease
This financing option is similar to a hire purchase but offers more flexibility. You’ll get full access to the equipment and make payments sometimes. Once you pay back over 90% of the cost owed to the lender, the equipment can be sold. The lender can give you the option of sharing the value of the equipment when it is sold. However, you can only buy the equipment partially, as in the other options.
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Asset Refinance
This option allows businesses to refinance their current assets by taking a loan against them. This means businesses can take loans for uses such as working capital or debt consolidation and use existing assets as collateral. The lender will then evaluate the asset based on its current value and may give you up to 85% of its total worth.
Types Of Assets To Finance
Asset finance can be used to buy any asset. These assets are divided into two categories:
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Hard Assets
These are physical assets, such as equipment, machinery, vehicles, and real estate. They have a long life cycle and require regular maintenance.
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Soft Assets
These consist of intangible items that do not have any physical form, such as software licenses, patents, copyrights, and trademarks. They can often be more expensive than hard assets to finance. However, they have less retail value at the end of the financing contract.
Conclusion
Asset finance is an excellent financing option for businesses that need to acquire expensive assets. Small businesses can access any equipment if they can pay for it during the contract period. As such, they don’t have to worry about hurting their cash flow or taking out huge loans.
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