In case you’re not familiar, let’s start with a short summary of asset finance.
Asset finance involves borrowing funds from a lender to purchase assets for your business, but unlike a loan, the funds are secured against the assets themselves. The most common types of asset finance are Hire Purchase – where you will eventually own the asset – and leasing which means you can use the asset for the duration of the agreement but will not own it (unless you choose to buy it at the end of the term for an additional fee).
Asset finance helps businesses to acquire the equipment, technology, vehicles, furniture, property, machinery (and more) that they need to operate, grow, and succeed, while spreading the cost over time and keeping working capital in the business.
You might be asking yourself, why don’t I just borrow the money from my bank, pay for the asset outright, and pay the loan back over time? A traditional bank loan is certainly an option, and in some cases might even be the right course of action, but it’s important to understand that asset finance has several benefits to offer.
One of the biggest attractions to asset finance over a bank loan is that asset finance is usually an unsecured product. Banks will often want collateral such as the directors’ homes and other valuable assets so that should you default on repayments, they can recoup some of their money. With asset finance, the funds are secured against the assets themselves, so if you default on the agreement they can reclaim the financed assets, but your personal assets won’t be at risk.
As long as you keep to your payment schedule an asset finance lender will not cancel the agreement. In some loan arrangements the bank reserves the right to recall the loan in full at any time – so make sure you understand all the fine print of any contract you sign.
An asset finance agreement will be subject to fixed interest rates, so you will always know what your monthly or quarterly repayments will be so you can budget accordingly. Unless you manage to secure a fixed-rate loan, your bank could increase rates at any time.
Some banks insist on strict terms and conditions when lending to businesses which can be unrealistic for businesses to keep to long-term.
Banks are generally more limited in terms of how much they can lend to a business when compared to asset finance providers. In some situations, a finance intermediary like Bluestone can arrange bespoke asset finance arrangements using multiple funders to ensure you get the funding you need.
Bank loan applications can be time consuming, especially for less established businesses as there are several stages to the application process and waiting lists can be lengthy. In many asset finance cases, funding can be secured in a matter of hours and in your bank account within days.
Some banks can be particular about the types of projects they will lend money for, and some specialist businesses can struggle to secure funding for some types of assets. Asset finance can be used for a huge range of assets and complex projects as there are lots of specialist funders who are experts in niche assets or unusual sectors.
No one has a crystal ball, and it is wise to keep as many lines of credit open for your business as you can. That way, should you want to invest in a development project, settle tax bills, or boost cash flow, you will have the option of a bank loan.
If you are planning on using the assets for as long as possible, it may make sense to purchase them outright with a bank loan. However, if you know it is more likely you will only need them for a specific period such as 3 or 5 years before needing to upgrade, why not spread the cost in line with their usefulness? If you lease the assets, at the end of the agreement you can either return the assets or pay a fee to buy them.
Spreading the cost of assets over time can unlock greater tax savings that would be available if paying for them with an upfront lump sum. Here is an example tax relief illustration* on a £50,000 purchase.
TOTAL COST OF ASSETS = £50,000, plus any interest applied to the original bank loan.
TOTAL COST OF ASSETS = £59,494.68 - £14,873.67 (TAX RELIEF) = £44,621.01
So, in this illustration using asset finance rather than a bank loan has unlocked greater tax savings and the total cost of the investment is actually cheaper than it would have been when paying for it outright with a bank loan by at least £5,378.99.
As an ethical and FCA-regulated commercial finance intermediary, it’s our duty to ensure our clients make informed financial decisions, and to do this we need to understand the intricacies of your business.
Both a bank loan and asset finance can help you get the assets your business needs without parting with working capital and affecting cashflow, but we can help you work out if asset finance could be a viable alternative and if it could bring added benefits.
Contact our team today to discuss your investment plans or simply to learn more about how we could add value to your financial strategy.
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