In order to remain competitive and grow, SMEs will at some point need to seek finance. There are many different types of finance available on the market for SMEs. For SMEs seeking finance for machinery, equipment or vehicles, asset finance may be the best option for them. 

What is Asset Finance?

Asset finance allows a business to acquire an asset without having to make a large payment upfront. Instead of this, the cost of the asset is spread out over time through regular repayments, typically structured as fixed monthly instalments or lease payments. The business will have full use of the asset during repayment. These smaller regular payments are more cashflow friendly for small businesses than paying upfront. 

There are typically three parties involved in asset finance; the borrower, the finance provider and the asset provider. 

Asset Finance is suitable to industries such as: 

• Agriculture

• Print

• Construction

• Engineering

• Manufacturing

• Materials Handling 

• Packaging

• Transport and Logistics 

• Waste and Recycling

Types of Asset Finance 

Hire Purchase 

The business agrees to purchase the asset over time through a series of fixed monthly payments. The borrower does not own the asset until all payments, including any interest, have been made. The lender owns the asset up until the last payment is paid. 

Finance Lease 

The finance provider purchases the asset on behalf of the business and leases it back to them for an agreed-upon period. The business pays fixed lease payments for the use of the asset, with the option to either return the asset at the end of the lease term or purchase it at a predetermined price.

Operating Leasing 

Operating lease offers a flexible approach to asset utilisation without the responsibilities of ownership. It provides the business with the temporary use of the asset for a specific period, without the option to purchase the asset at the end of the lease term. The asset is returned to the provider at the end of the term. Operating leases are suitable for businesses that require assets for short-term or project-specific purposes. 

Asset Refinance 

Asset refinancing involves using existing assets as collateral to raise capital for business purposes. The business unlocks the equity tied up in its assets by entering into a finance agreement with a lender, providing access to additional funds for expansion, debt consolidation, or working capital.

Benefits of Asset Finance:

• Preservation of Cash Flow: Asset finance enables businesses to acquire assets with minimal upfront costs, preserving cash flow for other operational expenses or growth initiatives

• Asset Ownership: Depending on the type of asset finance chosen, businesses may have the option to own the asset outright at the end of the finance term.

• Access to Up-to-Date Equipment: Asset finance allows businesses to access the latest equipment or technology without the need for significant upfront investment, ensuring they remain competitive in their industry.

Drawbacks to Asset Finance:

Asset finance, while offering numerous benefits, also comes with some drawbacks that businesses should consider:

• Cost: Asset finance arrangements often involve interest charges, fees, and other costs. These expenses can increase the overall cost of acquiring the asset compared to purchasing it outright. Businesses should carefully consider the total cost of financing over the life of the agreement.

• Ownership Considerations: Depending on the type of asset finance chosen, businesses may not own the asset outright until the end of the finance term. This means they may not have full control over the asset or the ability to make modifications or sell it without restrictions.

• Depreciation: For assets that depreciate rapidly or become obsolete quickly, such as technology or vehicles, asset finance may result in businesses paying for an asset that loses value over time. This can lead to situations where the asset's value decreases faster than the outstanding finance balance.

• Commitment: Asset finance agreements typically involve a commitment to make regular payments over an extended period. This can limit a business's flexibility and financial resources, especially if circumstances change, and they no longer require the asset or need to upgrade to newer equipment.

• Risk of Default: If a business fails to make payments on an asset finance agreement, there may be consequences such as repossession of the asset or legal action by the finance provider. Defaulting on asset finance can damage a business's credit rating and financial reputation.

• Restrictions and Conditions: Asset finance agreements may include restrictions and conditions that limit how the asset can be used or require businesses to maintain the asset in a certain condition. Failure to comply with these terms could result in penalties or termination of the agreement.

Application Process:

• Assessment: Businesses submit an application to the asset finance provider, including details about the desired asset, financial information, and business plans.

• Approval: The finance provider evaluates the application, considering factors such as creditworthiness, asset value, and business viability.

• Documentation: Once approved, the business and finance provider finalise the terms of the agreement and sign the necessary documentation.

• Asset Acquisition: Upon completion of the documentation, the finance provider purchases the asset on behalf of the business, and the business gains access to the asset for immediate use.

• Repayment: The business makes regular payments to the finance provider according to the agreed-upon terms until the finance agreement is completed.