Obtaining and deploying asset finance can be essential for business success.
In what follows, we will explain some of the key principles behind this approach to obtaining fast access to assets.
How to fund an asset
Although there may be many technical terms to describe the variations here, in reality, there are two major ways of being able to obtain an asset (such as plant, commercial vehicles etc.) to support your business operations:
- you can purchase it outright immediately from your own financial reserves – if you have sufficient funds to do so;
- by using some other form of funding mechanism which gives you immediate access to the asset but without necessarily needing to find the total sum necessary to purchase it from day-1. This second category is typically referred to as “asset finance”.
In some instances, your natural instinct might be to incline towards this option. Particularly if you have sufficient liquid capital reserves, you may legitimately question why you should consider any alternatives.
There is though the classic dilemma that once you have spent your capital reserves on an outright purchase that money has then gone and cannot be quickly accessed for other emergency purposes, should they arise.
Balancing your assets and debt against your working capital can be complicated and might typically require the assistance of an accountant even in the case of a modestly-sized SME. There may be times when it might be more sensible to keep your reserves in the bank and to consider other asset funding mechanisms.
What is asset finance?
The answer to that question “what is asset finance?” is simple. It’s a generic term describing a number of different ways that you may be able to secure the use of an asset without necessarily purchasing it. That typically involves paying a monthly sum to the facility provider, over an agreed period of time.
This eliminates any large capital outlay up-front for your business.
Asset finance includes options based around the concepts of:
- Hire Purchase (HP).
Choosing your asset finance method
As you might imagine, there are pros and cons when considering leasing options versus hire purchase. It isn’t a question of one method being better or worse than another but rather which is the most suitable fit for your company’s requirements at a given time.
To a large extent, your decision is likely to be influenced by whether or not you definitely wish to own your asset at the end of your monthly payments.
For example with hire purchase, once you make your last payment the vehicle becomes legally yours, as the funder transfers title and for the duration of the agreement you benefit from capitalising the asset on your balance sheet.
By contrast, at the end of a leasing agreement, you may be able to enter into a peppercorn rental and carry on using the item. This is normally equivalent of one monthly rental per annum. Alternatively, you may be able to sell it on behalf of the finance company and typically retain 95% of the sales proceeds.
Thinking carefully about how you gain access to an asset you need for business success, is imperative.
True, some of the issues to be considered may be complex but we are standing by waiting to help with advice and guidance. Why not contact us to discover more?