For most businesses, start-up or not, purchasing a brand-new asset outright can be an expensive procedure. If a business has recently started trading, a major and necessary purchase, such as new equipment or machinery can leave a big dent in a business’s cash flow. Even if a business is established and has been trading for a few years, purchasing new assets can make a hit into a business’s cash flow.
Asset finance can be a great way of breaking up these large payments as well as securing an asset over a period of time, without a business’s bank balance being weakened. It allows a business to purchase the equipment it needs and over a set time period, which can make the initial investment more affordable.
There are several different types of asset finance, but all have this same basic premise. Hire Purchase and Leasing are the two most common, with each letting you pay a monthly fee. The exact terms will come down to the agreement which is put in place with the original lender. Not only does asset finance stop a business from potentially taking a hefty sum out of its profits, but it also means that there isn’t too much cash tied up in one asset. When a business is just starting, or trying to grow, having a good flow of cash is essential, so monthly payments are much more manageable and offer greater scope to spread the cost of an asset.
Leasing & Hire Purchase
Leasing and hire purchase are very similar, but there is one major difference that makes them separate. When it comes to leasing, instead of owning the asset outright at the end of the contract, you instead can return it, upgrade it or pay it off to continue using the asset and legally own it. Effectively you are renting out the asset, whilst also paying it off and giving yourself the option to own it at the end of the contract.
The main difference between leasing and hire purchase is that towards the end of a hire purchase contract, the business would automatically own the asset.
Why would you consider asset finance?
- It’s a cost-effective solution for new or growing businesses, to effectively manage their cash flow
- Asset finance gives you access to more expensive, better equipment, which you might not have been able to afford if the business were to buy the asset outright
- With asset finance being paid in instalments, it makes budgeting and cash flow forecasting much easier
- When you lease an asset, the leasing company can be used to carry out maintenance on the asset
Negatives of asset finance
- If the business does not meet its instalments, it can have a negative effect on the credit rating of the business, which can affect future borrowing
- A failure to pay could also result in the asset being repossessed
- The length of some of the hire purchase and leasing deals can be quite long, during this time new or better assets may be available
- If a business is in the process off paying off an asset and it is damaged or stolen, the insurer may not cover the whole cost, with the business having to cover the shortfall
Although it has its cons, asset finance can be a brilliant solution for businesses who are struggling with their cash flow. Alternatively, if a business is looking for new, more up to date assets, but doesn’t have the immediate finances, it can be a great way of getting top of the range equipment.