Understanding Asset Finance: what you need to know

Braemar Finance have been working with businesses for many years, yet many business owners have a limited understanding of what Asset Finance is.

What is Asset Finance?

Asset finance involves raising funds to buy or hire assets, essential for businesses that lack upfront cash, especially start-ups and those facing cash flow issues.

Finance providers may either lend money to buy an asset outright or purchase the asset themselves and loan it to the company, with varying loan terms.

Asset Finance vs Asset-based Finance

Asset finance is used to purchase or hire equipment, while asset-based finance uses company assets as collateral for loans, often to ease short-term cash flow issues.

What is an asset?

To understand asset finance it is important to understand what an asset is.?An asset is essentially any piece of property owned by a business, for example, equipment, vehicles and technology.

Assets that are suitable for asset financing need to be durable, identifiable, moveable and saleable. Assets eligible for financing are often split into two categories - hard and soft assets.?

Hard assets

Hard assets are those assets which are durable and have a good resale value at the end of their term. They are most often used as security against asset-based finance due to their high resale value.

In other words, if you fail to pay the debt, hard assets will be able to pay it off instead. Hard assets include items such as heavy machinery and vehicles.?

Soft assets

Soft assets are those assets which have a lower resale value at the end of their term. Due to this fact, soft assets may require additional security to lower the risk of the borrower and secure the loan.

Soft assets include things such as IT software and medical equipment, which cannot be reused.?

Vehicle finance

Vehicles are a very common asset purchased through asset financing. Vehicles are expensive but necessary aspects to many businesses. However, it can be difficult to raise enough money to buy one, let alone an entire fleet.?

Asset finance can make a lot of sense when purchasing vehicles for several reasons including spreading the cost, and it can also protection from maintenance fees and depreciation.

Why use Asset Finance??

Advantages of asset finance include:

• More time to repay
• Spread payments over a number of months
• Manage cash flow
• Potential tax benefits
• Reduce upfront costs

Disadvantages of Asset Finance

Despite its advantages, there are some drawbacks to using asset finance that must be highlighted:

• If you can’t pay, the asset will be taken away
• You may not own the asset
• It’s not a short-term fix
• You may need extra insurance

Different types of Asset Finance

At Braemar Finance we offer three types of asset finance:

• Hire Purchase
• Finance Lease
• Refinance

Hire Purchase

Hire Purchase is the smart way to acquire the equipment you need for your business because you get to choose, use, and repay the assets over an agreed period, typically over a five-to-seven-year period, or the useful life of the asset.

The regular instalments cover the capital cost of the asset and the interest. At the end of the term of the Hire Purchase agreement, once all repayments have been made, ownership of the asset is transferred to you.

Finance Lease

Leasing is a type of asset finance that allows you to use the equipment you need without having to buy it outright at the end of the agreement.

You pay us ‘rent’ for the full use of the asset over an agreed term, which can be tailored to your individual circumstances. Over this period, you will pay the full cost of the asset, including interest.

Then, when you reach the end of the agreement, you can choose to:

• Continue to use the asset by payment of a nominal annual sum
• Sell the asset and keep most of the income from the sale
• Return the asset back to us
• Sign a destruction notice if the asset has no economic value and is no longer in use and cannot be resold, for example IT equipment

Refinance

Refinancing works by revising or replacing the terms of a single existing credit agreement that you currently have with another provider, which will then be restructured to suit your individual circumstances.

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Conclusion

Asset finance helps businesses acquire the assets they need to operate without the upfront costs and helps manage cash flow. While it provides significant benefits, it's important to consider the risks, such as potential asset loss if payments are missed.?With a clear understanding of these asset finance, businesses can make informed decisions that drive growth and success.

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Products and services are subject to eligibility, status, terms and conditions and availability. All lending is subject to status and our lending criteria. The right to decline any application is reserved.