With asset finance your business can gain access to assets such as machinery or equipment, or it enables you to release cash from the assets you already have.
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What is asset finance?
Asset finance relates to valuable items in your company. Ultimately, there are two types of asset finance:
- Equipment finance to get more assets
- Borrowing against existing assets
The first enables you to spread the cost of purchasing an asset over time — avoiding the need to buy an asset outright. While the second allows you to release capital tied up in valuable assets — this can be considered as a form of secured loan.
Asset finance — considerations
Common types of asset finance are equipment leasing, hire purchase agreements, finance leases and operating leases.
In Islamic finance there are financial products related to these forms of asset finance, with the difference being — Islamic banks take on some of the commercial risks (such as loss of or damage to the asset).
Almost anything can be considered as an asset. From a construction companies fleet of trucks, to a leisure centers range of gym equipment.
Should a business default on its payments, an asset-based lender may potentially seize the asset — selling it off to recoup any losses.
How does asset finance work?
A business that needs to purchase an asset may approach an asset lender for financing. The asset lender buys the asset and the business pays a monthly fee to use it — for the duration of the term contract.
Normally, you can spread the cost of the asset over many years. Some of the typical arrangements include equipment leasing and hire purchase. Operating leases are also popular, with the drawback to this being, you cannot own the equipment at the end of your rental contract.
As an alternative, asset refinancing gives you the opportunity to approach a lender and get cash released — based on the value of an asset you own. You can then uses the funds for almost any purpose, while paying back over the agreed term — with interest.
Types of asset finance
Hire purchase allows you to buy an asset and spread the cost over an agreed period of time. You pay either monthly or in installments. As you own the asset, you are liable for any insurance costs — as well as general maintenance. After the agreement term, you’ll have full ownership of the asset.
With equipment leasing, a lender will purchase an asset for you and subsequently lease the asset out to you. You’ll have access to the asset immediately, with only a small percentage of its cost paid down. At the end of the lease, depending on the agreement, you can pay to buy it outright, upgrade to something else or simply return it.
Finance leases (also known as capital leases) involve you renting an asset for most of the items useful life. This agreement works like you bought the asset directly — with you being being in charge of maintenance.
Operating leases can be considered as rental agreements. These agreements usually have a set term — with any maintenance handled by the lease company.
Refinance is when a company sells an asset to an asset finance provider — for a lump sum payment.he business is then able to lease back the asset, just sold, in exchange for regular repayments.
Benefits of asset finance
- Access to high-tech equipment you may not be able to afford outright
- With some leasing agreements — the finance provider is responsible for maintenance
- Widely available financing option
- In the case of asset refinance — allows you to get funds against valuable assets you own
Limitations of asset finance
- May have to put down a significant deposit
- Can be more expensive than buying the asset outright
- Longer term agreements, particularly finance leases, can be difficult to cancel
- Assets can be repossessed — if you fail to make repayments
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