Business in the UK is usually associated with substantial capital goods expenditures including purchase of fixed assets necessary to undertake the firm’s activities or increase its production capabilities. However these investments reduce cash flow and result in restriction of working capital. The problem solved by asset financing is in the fact that, unlike purchasing assets directly, it does not require large cash outlays which could severely affect the company’s cash flow.

As TVR Accountants, we know that choice of the right financial strategies for your business is crucial. In this blog, we’ll also discuss asset financing, its categories, advantages and with reference to other financing facilities.

What is Asset Financing?

Asset financing enables business organizations to acquire organizational assets such as machinery, information technology equipment or vehicles but not necessarily through outright purchase. Decisions regarding financing are made in a different way: instead of making a large single payment, you pay throughout the time, keeping your cash balance intact and obtaining everything your business requires.

Your existing stock also holds potential as you can easily pledge it to get yourself the funds you need. Depending on the agreement between the financier and the user, the finance provider may own the asset for the entire payment period, but there is usually the option of returning, purchasing, or upgrading at the end of terms.

Types of Asset Finance

There are several types of asset finance to consider, each catering to specific business needs:

1. Finance Lease

It means that with a finance lease, the provider acquires an asset on your behalf and then takes it to you as a lease hold for a set amount of time. You make an instalment, which balances the cost of the asset and its interest.

Benefits:

• No large upfront cost.
• Flexibility in payment terms.
• Option to renew the lease or make further leases or to sell the asset.
• On the lease rentals, it is possible to recover the amount of VAT.

Considerations:

• During the lease period, a lessee does not have a right over the asset.
• You are to purchase maintenance and insurance of such property at your own expense.

2.Operating Lease

An operating lease allows you to use an asset for a certain period of time, whilst at the same time giving you the right to revision during the tenure of this lease. Sometimes, basic maintenance also forms part of what the provider offers.

Benefits:

• Spread payments over time.
• Upgrade that involves getting older models out of the market by replacing them with newer models.
• Reduced costs of maintainability as compared to built-in design.

Considerations:

• Providers retain the ownership of such property.
• Expenses can run higher than the current market price of the asset either in the short run or in the long run.

3. Contract Hire

Taught for vehicle and fleet financing, contract hiring provides fixed payments combined with the possibility to buy or abandon the asset at the end of the agreement.

Benefits:

• It is easier to plan for because its costs are more predictable than the costs of owning and maintaining physical assets.
• Several choices based on the possibility of an upgrade or choosing maintenance services.
• Mainly leasing and partially hire, the terms are more liberal and typically run from 12 through 84 months.

Considerations:

• You stand to be penalized for over usage of certain key facility, the commonly used ones being the likes of mileage in the case of cars.
• Ownership is possible only after the payment have been made.

4. Hire Purchase

From the purpose of the financier, hire purchase is more appropriate for those businesses that want to own an asset. You pay and take it in installments, and own the item at the end of the payment.

Benefits:

• Clear path to ownership.
• Tangible or intangible benefits depending on when the payment has to be made.
• Tax-deductible payments.

Considerations:

• Higher costs in the long run if sustained over a long term period.
• Otherwise, it is on the basis of the management responsibility for maintaining the asset.

Benefits of Asset Finance

Asset finance is yet one more flexible form of financing compared to more conventional one loans. Here are some of the key advantages:

• Preserves Cash Flow: Leverage does not involve high initial payments, and ensures you keep your working capital strong.
• Access to Latest Equipment: Lease new production tools or a new piece of technology with little to no down payment.
• Tax Benefits: Lease costs are allowed as a form of taxes and there are certain allowable capital costs that can be taken out of purchases.
• Simplified Maintenance: Repayment is made directly to the provider of the product or service and it depends on some conditions that state whether the provider will handle the repair or replacement.
• Quick Approval: Agreements can be processed fast and many providers can provide quick access to assets.

Risks of Asset Finance

While asset financing is beneficial, it’s essential to understand potential risks:

• Non-Ownership: As a general rule, the provider owns all equipment and materials; you may hear yourself restricted from utilization of these assets.
• Long-Term Commitment: Contract length may vary between several years thus putting much emphasis on the working capital cycle.
• Default Consequences: Delays in payments are devastating to credit score and puts future loans at risk.

Asset Financing vs Asset Refinancing

It’s crucial to distinguish between these two financial solutions:

• Asset Financing: It means to directly buy new assets for use in your business.
• Asset Refinancing: This allows the organisation to release cash which is held up on existing assets through the securitisation process.

Is Your Business Eligible?

A common source of funding is asset finance which can be availed by business in their initial stages of development right up to subsequent tier levels. Lenders typically assess:

• Credit history.
• Financial stability.
• The possibility to fulfill the obligations for repayment.

To assist you in the understanding of these regulations together with connecting you with the most suitable financier, consult with TVR Accountants.

How TVR Accountants Can Assist

As we know, managing asset financing is often a challenging process, and you do not need to tackle it on your own. At TVR Accountants, we offer:

• Expert Guidance: Business oriented advice for each client.
• Streamlined Applications: Support in providing documentation various, which ranges from accounts to cash flow forecasting among other services.
• Lender Network: A list of accredited finance service companies.

Contact Us

Are you in need of asset financing for your business? You should consider talking to us at TVR Accountants today. For more information, our team of professionals is always available to help you every step of the way.

Call: 01284 332375

Email: info@taxvatreturn.co.uk

Funding assets must be the magic word for your business to grow to the next level. Let TVR Accountants help you to define the way of reaching the best solution for you.