If you own a small business and you want to expand your production capacity but the cost of buying the equipment outright you want would be significant enough to create cash flow issues, asset financing may be the right choice for you. In this article, we explain what asset financing is and how you can use it to consolidate or grow your business.

What is asset finance?

Asset finance is used by businesses of all sizes so that they can install the equipment they need to replace aging existing equipment or to add new equipment to meet customer demand. These pieces of equipment are normally too expensive to buy outright so asset financing is used instead meaning that you can pay for them on a monthly basis.

Your business gets the equipment it needs to trade but, because you’re using asset finance, the disruption to your cash flow is minimal. When your deal is being structured, attention is paid by a funder to the amount of positive cash flow your business generates every month so that your payments can sit comfortably within that range. This causes minimal disruption to the typical levels of retained cash within your business giving lenders the extra comfort and assurance they need that entering into the agreement does not pose a risk to the future of your business.

What can I finance?

There are two types of asset you can finance – hard and soft assets. Hard assets are typically machines like agricultural machinery, buses, and manufacturing equipment.

One important factor in deciding whether an asset is hard or soft is if the asset has a resale value. Hard assets still have value if they are used whereas soft assets typically have a low resale value. Indeed, many hard assets acquired by businesses through asset finance are pre-owned demonstrating the value they hold over time.

Examples of soft assets include catering equipment, gymnasium equipment, medical equipment, and IT software.

It is not uncommon for a lender to require a form of additional security if you make an application to fund a soft asset because of the asset’s inability to hold onto value over a longer term. This security tends to come in the form of a director’s personal guarantee – this means that you, as the business owner, will take some or all of the responsibility for settling any outstanding balance on your asset financing account if your company becomes unable to service those debts.

How can I finance these assets?

There are two main types of asset financing products available in the UK currently.

Leasing an asset means that you hire it for a pre-determined stretch of time however you will never own it. This is a cheaper alternative to hire purchasing (more on that later) in the short run. This is because the lender will never lose the asset meaning that, should you be unable to meet your agreed repayments, the lender can simply find another company to hold the asset on a new asset financing contract.

Hire purchasing is the alternative method of funding and, in many ways, it works in a similar way to leasing an asset. The difference is that you own the asset at the end of the term of the lease. This will push the price to you up overall – by the end of the contract, you will likely have paid up to 25% more for the product than if you had bought it outright.

On the other hand, you will be able to pay this amount over a much more manageable time frame. Hire purchasing contracts can last between 12 months and 60 months. These longer contracts reduce the size of the monthly payments leaving your account however, over a longer term, the finance charges you pay will be higher.