Asset Finance - Integrum Finance Ltd

What is Asset Finance?

This type of finance is used to describe ‘Leasing’ or ‘Hire Purchase (HP)’ solutions for businesses. There are various products available which allows businesses to purchase assets which might otherwise be out of reach due to cash flow or have the need or opportunity to grow but may not have the funds readily available.

The leasing or HP products usually involve paying a regular charge for an asset over an agreed period of time (term), which avoids the full cost of buying the asset outright.

The purchase of assets in this way can range from small i.e., office telephone equipment, coffee machines to large i.e., heavy goods vehicles, plant and machinery.

Why use Asset Finance?

Asset finance is very flexible and can be used to fund any size of asset and it could be the perfect solution if your business needs new equipment or machinery that is unaffordable but is needed to help the business grow. This type of finance is suitable for all companies ranging from sole traders, small to medium-sized enterprises, as well as larger companies and corporations.

It gives businesses the ability to purchase equipment without impacting cash flow if they were to buy it outright. Moreover, it allows businesses to have equipment and machinery that is the most up to date and therefore may well be more efficient than existing assets.
Tailored agreements to the business’ requirements can be made which provides flexibility on the amount being paid (repayment schedule) and the term of the agreement.
Leasing and HP agreements are usually fixed which improves cash flow management and thus are an excellent budgeting tool. They are also a useful alternative to bank loans or overdrafts which normally charge higher interest rates.

When using asset finance to purchase very expensive machinery or equipment, the asset itself acts as the security for the loan.
If leasing or hiring, expensive equipment or vehicles maintenance and servicing costs are all borne by the provider, not your business (depending on the type of finance deal arranged)
The depreciation risk of the value of the asset may fall to the provider and not the business. Additionally, if the asset requires replacement before the end of the agreed term, then the provider must replace this at their own cost (depending on the type of asset finance agreement).

The amount that can be borrowed and over what terms differs from one lender to another, however, this type of finance can range from £1,000.00 to £10 million and the terms can vary from 1 to 10 years. Notwithstanding this, it must be noted that lenders will assess the risk of lending against ‘affordability’, in terms of businesses being able to pay back the loan and also the effective lifetime of the asset that is being purchased.

Ordinarily, asset finance is arranged without the need for additional security and in the unlikely event that it is, you will be informed as early in the process as possible.

Types of Asset Finance

Hire Purchase (HP)Finance Lease Equipment Leasing Operating Leasing Asset Refinancing

Hire Purchase (HP) (or Lease Purchase) – this is similar to a personal hire purchase agreement where the HP provider retains ownership of the asset throughout the term of the agreement and leases the asset to the business for agreed regular fixed payments. Generally, businesses are able to make an initial larger payment followed by lesser amounts over an agreed term and at the end of the agreement there is the opportunity to buy ownership of the asset outright with a further payment.

Finance Lease (or Capital Lease) – does not allow the opportunity for the business to own the asset outright. The business merely leases the asset ordinarily until the lender has recovered the purchase value of the asset. In some circumstances the lender may allow the business to share a percentage of the sale value of the asset once it has been sold. From an accounting perspective, businesses may be able to offset the lease payments against their profits and can reclaim VAT.

Equipment Leasing – this is similar to Finance Leasing in so much as the lender purchases the asset and leases it to the business for a fixed fee over an agreed term. Once the term is complete, the business has the option to extend the lease, upgrade the asset, purchase the asset at an agreed cost or simply return it to the lender. Unlike Hire Purchase, the servicing and maintenance of the asset are the responsibility of the lender and not the business. Additionally, this type of leasing can be offset against gross profit.

Operating Leasing – this is similar to Equipment Leasing but is generally used for specialist machinery or equipment where the business has no interest in buying the asset and where it does not expect to use the asset for the full duration of the expected lifetime of the asset.

Asset Refinancing – this type of finance is different from a straightforward secured loan as the business can use the physical assets that it owns or in some cases it partially owns as collateral to the value of the equity within the respective asset against new finance. By way of an example, a business has a HP agreement for one of its heavy goods vehicles which it wishes to upgrade and the value of it is £25,000.00. They only have £5,000.00 left to pay on the HP agreement, and thus it has £20,000.00 of equity which can be used as collateral to refinance the new vehicle. Usually, businesses are able to borrow 70% of the equity which in this example would be £14,000.00, thus giving the business a total of £34,000.00 refinancing.