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For a lot of businesses, new or experienced, the cost of buying assets outright can be a major expenditure. Even if a business has been trading for a few years, the cost of replacing a large asset, or buying new equipment can still leave a burning hole in a company’s cash flow. Regarding new start-ups, owning equipment outright can be a huge expense when cash flow is normally tight, and there is a limited amount of initial investment.
Financing assets can be a great way of disrupting the costs of buying new assets outright. As opposed to spending one large settlement, essentially it allows you to cover the cost of the asset on a monthly basis, breaking up payments. Financing makes the initial investment of a big asset much more affordable.
Asset finance is a general term, used for several different methods of financing. But they all have a similar premise. Hire purchase and leasing are the two most common, with both of them allowing you to pay a monthly fee. Usually, the exact terms of the agreement will depend on the deal put in place with the lender. The payments made towards a hire purchase asset, eventually result in the business owning the asset. Leasing, on the other hand, works slightly differently, instead of owning the asset outright towards the end of the contract, you can instead return it, upgrade it, or pay it off to legally own the asset.
The biggest difference between leasing and hire purchase is that the end at the end of a hire purchase contract, the business will automatically own the asset.
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Pros of asset finance
- For new or growing businesses, it can be a manageable way of handling cash flow
- Without having to pay one large upfront settlement, asset finance gives you the means of being able to afford top of the range equipment, which you might otherwise not have been able to afford
- Payments in instalments make cash flow forecasting much easier, giving the business greater scope for budgeting
- When you lease an asset, the leasing company can be used to carry out any maintenance and repairs on the asset.
Cons of asset finance
- The duration of some of the hire purchase and leasing deals can be quite lengthy, lasting several years, by which time there may be better assets available
- A failure to pay any of the monthly instalments could result in the assets being repossessed
- Any late or non-payments can sometimes have a negative effect on the business’s credit score
- If an asset finance deal is in the process of going through payment and the asset is damaged or stolen, the insurer may not cover the whole cost, with the business possibly having to cover the shortfall
Cash is king and problems with cash flow are one of the most common causes of business closure. Asset finance can ease some of those pressures, especially for new businesses who only have a limited amount of set up funds. Asset finance gives businesses the opportunity to manage their expenditure with better forecasting and know how much money is going out of the business.
The negative of some asset finance deals is that the length of contracts can be long. If a company wants to move on and buy new equipment again, it can be difficult as the business is already tied into a contract. If the business is looking to raise further finance, it can’t take out on credit based on the value as it doesn’t own the asset.
Asset finance can be an excellent solution for businesses who struggle with cash flow and need to plan effectively. Naturally, it has its pitfalls, but it can be a great way to get top of the range equipment.
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About the Author
Edward Wade: I am a freelance journalist, who studied Business at Sheffield University. Now based in London I produce content online across a variety of different topics.
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