Purchasing new equipment, vehicles or machinery for your business can come at a high cost – one that many businesses simply can’t afford upfront.
Asset financing is one way to purchase the equipment you need, without creating a dent in your cashflow.
What is asset finance?
In asset financing, a business uses its own assets as security against a new loan.
This makes it easier to buy and use items without having to make large payments in one go. Instead, you can make payments in instalments over time.
Depending on the type of asset finance you go for, you might own the item after your payments are made, or you might return it to the provider.
The flexibility of this type of arrangement has made it a popular option for many business owners looking to use new equipment without bearing the full responsibility of maintaining it.
Types of asset finance
There are a few different types of asset finance, but the three most common options are:
- Hire purchase, which allows you to pay for an asset in instalments. You’ll own it once all of your payments are made. With this option, you are responsible for the asset’s upkeep.
- Finance leasing, where a leasing firm purchases the asset on your behalf and rents it to you. At the end of the agreement, you can extend the rental period, return the equipment, or sell it on the leasing firm’s behalf.
- Contract hire, which applies specifically to vehicles. You make regular payments to a provider, who’ll find and maintain the vehicles you need on your behalf. After the period, the provider is responsible for the vehicles.
Pros and cons of asset finance
Asset financing comes with several advantages, including:
- Small, fixed repayments, with fixed interest rates, making it easier to plan your cashflow
- Less responsibility for upkeep of the machinery, and the option to return it at the end of your lease
- You’ll have faster access to business assets than building up the funds to purchase them outright
- Tax benefits in some cases, including reclaiming VAT on hired vehicles
- Access to new equipment and the latest technology, which could give your business a competitive edge.
It’s important to consider the potential disadvantages, however:
- Interest and fees will be due as part of your payments, which could mean it’s not worthwhile over a long period
- There’s a risk of losing the asset you use as collateral, and if you’ve put forward something that’s valuable to your business, this could have severe impacts
- The value of the assets could decrease while you’re paying for them
Asset finance can offer a real boost to small businesses, but as with any kind of financing, it’s important to talk to an expert before you make any decisions. At FMA Accountants, we work with SMEs and startups to reach their growth goals. We can explore your options for funding an asset purchase, and determine the best route for your business. Get in touch to find out more.