Growth is the end goal for every business, but for most companies, the only way to get there is to take out finance to spearhead expansion options. A business might have a demand to increase their offering and grow their business, but having the capital available to materialise and accommodate the demand is a whole other ball game; especially for SMEs.
The obvious option for a business wanting to expand but without the working capital to do so is to take out a loan or finance agreement. There are several types of loans and finance available, but if you’re looking specifically to grow your business and need to purchase new assets and equipment in order to start the process, asset finance could be the most appropriate way to do it.
So, what is asset finance? In this article, we’re going to look at asset finance in more detail, giving you a better idea of what it is, how it can be used, if it’s suitable for your business, and how to go about securing it.
What is asset finance?
Asset finance is a type of business loan that is used to fund the expansion of businesses through buying equipment, machinery, and other types of assets that are fundamental to the operational needs of the company. If you want to increase your output capacity, make your business more efficient with newer equipment, or take on a big project but don’t yet have the infrastructure in place to do so, asset finance could be a suitable funding option.
Hard vs soft assets
There are two main types of assets that are funded by asset finance:
- Hard assets – this generally refers to large pieces of equipment like machinery, vehicles, and manufacturing equipment
- Soft assets – this can refer to IT software, or medical/gym/catering equipment
Hard assets are counted as anything that retains its value, even when it has been used. For example, a printing press will still be worth a considerable amount after being used, provided it’s not damaged. The same goes for a delivery truck or a tractor.
On the other hand, soft assets are those that generally have a low resale value after being used. For example, gym equipment like soft mats or a treadmill may still be worth something on the resale market, but the value of them will have considerably dropped since purchase.
Generally speaking, there is a lender out there that will be willing to finance almost every type of business asset, hard or soft, but it’s not unusual for independent lenders to have a preference pertaining to the type of assets they prefer to lend finance for.
Types of asset financing
Like anything, there are several types of asset financing available depending on your exact needs. Some businesses only need new assets on a temporary basis, others need to buy new assets completely, and some need to release equity from assets they already own to help with cash flow. The scope of asset finance covers all three of these scenarios, ensuring you’re able to find the right fit for your business.
Hire purchase asset finance
Hire purchase asset finance, sometimes known as vehicle asset finance, works in the same way as hire purchase finance for a vehicle. A lender will provide you with the finance to buy an asset in full, and you will agree monthly repayment terms with them to pay off what you borrowed, plus interest, over a set period of time. Once you’ve paid off your finance, you own the asset. Until then, the lender owns the asset. If you default on payments, they may revoke your business assets.
Equipment leasing asset finance
Equipment leasing asset finance, also known as finance leasing, is similar to leasing a car. Asset finance providers will supply you with the finance to access an asset and you pay them an agreed monthly amount to use it. Essentially, you’re renting the asset from the lender. At the end of your equipment leasing term, you typically have three options: extend the lease for an agreed amount of time, pay the outstanding balance to purchase the asset and own it in full, or give the asset back entirely or swap it for a different (generally newer) version.
Asset refinance
If you already have an asset and want to release equity from it to manage cash flow or purchase something new, you can refinance the asset through asset refinancing. Most asset finance companies will generally lend up to 80% of the total value of your asset. You can use the money for a variety of things, but this is also a good option if you are able to negotiate more favourable loan terms from different financial services providers.
How does an asset loan work?
Asset based finance in any capacity is a short-term funding solution. Asset financing generally spans one to seven years, with monthly payments being the standard way to pay what you owe. In essence, it works the same way as business finance of any other type.
Lending amounts depend on the type of finance you need and your ability to make affordable monthly payments. With this in mind, most lenders will offer finance from £1,000 upwards, but it mostly depends on your accounts, the value of the asset, how much it will depreciate over the loan term, how fast the lender wants their money back, and how much you can afford to pay every month.
Is asset finance beneficial?
In short, yes, asset finance can be incredibly beneficial to your business. It offers several advantages that are appealing to most companies seeking to grow and expand in an affordable way. Some of the main benefits of asset finance include:
- Ability to purchase expensive, big-ticket assets with either very small or zero upfront fees
- Affordable finance spread over a number of years – growth is more accessible
- No collateral is required because the asset itself is collateral for the lender
- Maintenance/repair costs may be covered by the lender (terms depending) over the duration of the finance agreement as they ultimately own the asset
- Enables you to grow your business and maintain cash flow without impeding on your immediate capital
- More accessible and affordable for the majority of businesses, including SMEs
There are, of course, things you need to keep in mind when taking out business asset finance. They’re not necessarily disadvantages, but they are worth considering before agreeing to a loan term. They include:
- Assets may be repossessed if you fail to make your agreed repayments because the lender owns the asset until you pay off your loan term in full
- Limits may be placed on the asset, such as a certain amount of allowed mileage – if you exceed the restricted limit, you may have to foot the bill
Overall, asset finance is an affordable and viable solution for businesses to expand their horizons, and the negatives are typically outweighed by the positives, but it’s important you consider all your finance options before choosing one.
Asset finance eligibility
Like any kind of finance or loan, there are lending conditions that will dictate your eligibility to apply for asset finance. Generally speaking, it’s a viable option for most businesses, but your business accounts, your trading history, and the type of asset you want to finance will be deciding factors.
If your business has a poor credit history or isn’t the most established so doesn’t have too much of a credit history, a lender will seek to establish your monthly turnover vs your existing expenses in order to determine whether or not you are able to pay back what you owe. Don’t be put off if you’re an SME or a business with a bad credit rating – there are lenders who work with businesses like yours and who may still be able to help you.
Applying for asset finance
Applying for general business asset finance is a simple process, especially at Aurora Capital. We work with a wide range of lenders offering all types of asset finance and payment terms. You can apply online in just a few minutes, with no damage to your credit score for doing so. Our AI-powered decision engine will pair your business with the most suitable lenders based on your application information, working to find you the very best terms and benefits.
Our platform is fast, meaning you could be matched with a lender and have the finance available to you in less than a week. This is ideal if you need to appease your cash flow quickly or replace an asset that is broken.
Get advice on asset finance
If you would like more information on asset finance and how it could be beneficial to you, or the asset finance industry as a whole, please get in touch with one of our finance experts today.
