Understanding the Basics of Asset Finance

Asset Finance Explained

Asset finance is a type of financing that helps businesses acquire the assets they need to operate and grow. But what are the different types of asset finance? There are several different types of asset finance, including finance lease, lease purchase, and hire purchase. In this article, we will explore each of these financing options in detail, including how they work and the pros and cons of each.

Asset finance is a type of financing that allows businesses or individuals to acquire assets, such as equipment or vehicles, without having to pay the full cost upfront. Instead, the asset is financed through a loan or lease agreement, and the borrower makes regular payments to the lender. The asset serves as collateral for the loan or lease, and the lender has the right to repossess the asset if the borrower defaults on the payments.

Asset finance can help all manner of businesses access the funding and equipment that they need to perform their prime functions. Options are available to limited companies, sole traders and everyone in between. Here's your guide to asset finance and how to secure a loan for your business from a finance provider...

Asset Finance Explained -

A guide to asset finance

Hire Purchase

Hire purchase is a type of asset finance that allows a business to buy and pay for an asset over a set period of time, with the business obligated to purchase the asset at the end of the repayment period. The finance company typically owns the asset until the final payment is made, when ownership transfers to the business. Hire purchase agreements may be secured or unsecured, depending on the value of the asset being purchased and the creditworthiness of the borrower.

The business makes fixed monthly payments for a set period of time, usually between one and five years. At the end of this period, the business has paid off all of its debt and ownership transfers to them. Hire purchase agreements can involve high interest rates, so it's important to shop around for competitive rates before committing to an agreement.

One of the main benefits of this type of financing is that it allows a business to acquire an asset without having to make a large upfront payment. This can be particularly useful for businesses that do not have the cash on hand to purchase the business asset outright or that want to preserve their cash for other purposes.

Whilst hire purchase comes with the aforementioned benefits, it has it drawbacks in that the business does not own the equipment or asset until all payments have been made in full. This means that the business does not have the same level of control over the asset as it would if it were the owner. Additionally, the organisation may have to pay additional fees if it decides not to purchase at the end of the term. It goes without saying that this type of business finance may come with higher interest rates than can be found from a standard loan.

Finance Lease

A finance lease, also known as a capital lease, is a type of lease agreement in which the lessee (the party that is leasing the asset) is responsible for the maintenance and insurance of the asset during the term of the lease, and has the option to purchase the asset at the end of the lease. The lessee also typically makes regular lease payments to the lessor (the party that owns the asset) over the term of the lease, with the payments typically including both an interest component and a depreciation component.

Finance leases are often used to acquire assets such as equipment, vehicles, and real estate. They are a popular option for businesses that need to acquire assets but do not have the cash or credit to purchase them outright. Because the lessee is responsible for the maintenance and insurance of the asset, the lessor bears less risk than in an operating lease. In addition, finance leases are typically longer-term than operating leases, with a term of several years.

A finance lease transfers substantially all of the risks and rewards of ownership of the asset to the customer, so that the asset appears on the customer’s balance sheet, with all outstanding rentals represented as a liability. The customer has control over the use of the leased asset and pays all costs associated with it, such as insurance, maintenance and repairs.

The lessor is entitled to a stream of rental payments throughout the lease period, usually at the end of each month. At the end of the finance lease term, the customer may have an option to purchase the asset at a pre-agreed residual value. A finance lease assigns almost all the hazards and benefits of possession of the asset to the customer, thus making the asset appear on the client's financial statement, with all unpaid rentals defined as a responsibility. The customer is in control of how the leased asset is used and pays for any related costs such as insurance, upkeep and fixes.

Lease Purchase

A lease purchase is a type of financing option that allows a lessee to rent a new asset or second-hand asset for a specified period, with the option to purchase the asset at the end of the lease. The lessee typically makes regular payments to the lessor, which may include a portion that goes towards the purchase price of the asset. The lease purchase agreement will also typically include details such as the purchase price of the asset, the length of the lease term, and any contingencies or conditions that must be met for the purchase option to be exercised.

Lease purchase agreements are commonly used for the acquisition of assets such as real estate, vehicles, and equipment. It can be an attractive option for businesses or individuals who want to acquire an asset but may not have the funds to purchase it outright, or do not want to commit to purchasing the asset until they have had a chance to use it and determine if it meets their needs.

A lease purchase agreement is a hybrid of a lease agreement and a purchase agreement. The lessee can use the asset for the term of the lease and then purchase it, or simply return it at the end of the lease without purchasing it. It is important to understand the terms and conditions of the lease purchase agreement, such as the purchase price, the length of the lease term, and the option to purchase before entering into the agreement. It is also important to consider any additional costs such as maintenance, taxes and any penalties for early termination of the lease.

Asset Finance Explained -

What are the benefits of asset finance?

  • No need for large upfront payment: Asset finance allows businesses and individuals to acquire big-ticket items, such as equipment or vehicles, without having to pay the full cost upfront. This can be beneficial for businesses or individuals who may not have the funds to purchase the asset outright.Improve cash flow: By spreading the cost of the asset over time, asset finance can help to improve cash flow and reduce the financial burden of purchasing an asset outright.No need for extra collateral: The asset itself serves as collateral for the loan or lease agreement, which means that businesses do not have to put up additional assets as collateral.Flexibility in payment: Asset finance agreements often provide flexible payment options, including the option to pay off the balance early or to make larger payments when cash flow allows.Tax benefits: In some cases, the payments made under an asset finance agreement may be tax-deductible.Maintenance and replacement: In many cases, the expense of maintenance is borne by the finance company, not the borrower. Additionally, with some types of asset finance, the provider must replace the item if it becomes faulty during the rental or loan period.Capital release: Asset finance releases capital for use elsewhere in the business, allowing the business to invest in other areas that may be more crucial for growth.Cost savings: Asset finance can be cheaper than other forms of business financing, especially for businesses that need to upgrade their equipment frequently.

What are the Cons of Asset Finance?

  • Higher overall cost: In some cases, the overall cost of the asset may be higher when financed through an asset finance agreement than if the asset were purchased outright. This is because interest and other finance charges may be added to the cost of the asset over the term of the agreement. 
  • Long-term commitment: Asset finance agreements typically have a longer term than other forms of financing, which can make it more difficult to get out of the agreement if the asset is no longer needed or if the business's financial situation changes.
  • Risk of repossession: If the borrower is unable to make the required payments under the asset finance agreement, the lender may have the right to repossess the asset. This can be disruptive to the business and damaging to its reputation.
  • Limited ownership: The borrower may not have full ownership of the asset while the finance agreement is in place, which may limit their ability to use or dispose of the asset as they wish.
  • Early termination penalties: Some finance agreements may have penalties for early termination, which can be costly for the borrower.
  • Depreciation of assets: Over time, the value of the assets may depreciate and the borrower may end up owning an asset that is worth less than what was originally borrowed.

We work with UK businesses to help you find and acquire the equipment and resources you need to grow your business. You can choose from a range of products and services, including different lines of asset credit, to find the perfect solution for your business needs. With AFARL, you can have the peace of mind knowing that you're in good hands and have access to the best possible asset finance solutions that's right for your business. You can contact us here or easily apply online.  We are committed to providing your business with the best possible asset finance solution, tailored to suit your individual needs. Whether you need a short-term loan or long-term financing, we can help you find the perfect fit. We understand that every business is unique and will work closely with you to ensure that you make an informed decision.

When you choose AFARL, you can rest assured that our team of experienced professionals will be there to support you throughout the entire process. Our experienced advisors will help you identify the most appropriate product for your needs and guide you through the application process from start to finish.

If you have any questions about our asset finance solutions or how we can help your business grow, please do not hesitate to get in touch with us today.

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Disclaimer: Asset Finance and Refinance limited act as a licensed credit broker and not a lender, authorised and regulated by the Financial Conduct Authority, registration number 773835. All finance is subject to status and income. Applicants must be 18 or over, terms and conditions apply, guarantees and indemnities may be required. Written quotations on request. Certain exclusions for NI residents. Asset Finance and Refinance Limited can introduce you to a limited number of finance providers based on your credit rating and we may receive a commission for such introductions.
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