3 Types Of Asset Finance And When You Should Use Them

Are you looking to invest in used or new business equipment?  If that’s the case, then, you may be interested in asset financing. It’s a financing setup that can make your purchases more affordable.

If you want to learn more about asset financing, it’s different types, and when to best use them for your individual or business needs, read on!

Asset Financing: How Does It Work?

Before tackling the different asset financing types, it’s crucial to understand how asset finance works first. Often, asset finance refers to the purchase of a plant, machinery, vehicles, inventory, or anything else of a similar value (or cost) for a company. Generally, businesses and organizations that don’t have the financial resources to buy such goods will often use this type of finance to help them get to where they want to be in terms of sales.

If you’re running a company, it’s quite likely that your company already has assets (such as buildings, machinery, cars, etc.), which can be used to provide your finance for the purchase of the other assets. The assets you already have are also considered a form of collateral for the loan. These types of assets may include shares in a business or even real estate.

Usually, the loan will be made over a long-term period, and the payment term can range from five years to 30 years. Of course, the longer the payment term, the higher the interest rate that will be charged. You may also be required to make monthly payments on the loan for a pre-determined period of time. That being said, this type of loan should be considered carefully and only used for manufacturing equipment that’s going to be used on a consistent and ongoing basis. Otherwise, it will end up costing you money in terms of interest costs.

Three Principal Forms Of Asset Finance

Asset-based financing has three principal forms. They include lease and hire purchase agreements. Here’s a closer look at them:

  • Finance Lease

What is finance lease?  It’s a common form of renting an asset. Generally, finance lease is available for private individuals, but is also the preferred choice for VAT-registered business partnerships, limited corporations, and sole traders as it provides the owners with the maximum tax benefit. But, what are the different types of finance leasing?  You can rent vehicles, buildings, office spaces, even boats and aircrafts. One of the main advantages of finance leasing is that it helps businesses cut on the costs of buying land, buildings, and running infrastructure. This is a more cost-effective business loan solution for any business owner looking to expand.

So, how does finance leasing works?  The finance leasing agreement is between the lessee or the tenant and the loan company. In this agreement, the lessee agrees to pay the monthly rental amount, and the loan service provider agrees to provide capital, credit lines, and other collateral to enable the lessee to pay the monthly rent. This agreement between the lessee and the loan company will remain in force until both parties decide to end the contract.

  • Hire Purchase

In case you’re looking to purchase an asset for your business venture, then, it’s a good idea to make use of the hire purchase type of asset financing. Such form of asset finance is used by business owners who are looking to obtain an asset for their business. This asset financing form offers flexibility to the investor, while considering various other options available because it allows them to immediately use the asset they’re trying to buy even if they’re still repaying the installment costs. There’s a wide range of assets to choose from, like land, buildings, machinery, and other equipment.

Basically, what happens with hire purchase financing is that the lender buys the equipment on your behalf. The lender maintains ownership of the asset until you make the final payment to them. It’s important to take the time to research and choose an appropriate lender for this type of financing.

  • Operating Lease

An operating lease is an agreement that allows the usage of a property without giving ownership rights over that property. A typical operating lease is often described as an off-balance sheet financing arrangement, meaning that an organization isn’t required to report any assets, liabilities, or other financial information relating to the lease. Operating leases are generally considered a form of unsecured debt financing, meaning that any future lease payments, which include payment of rent or a portion of the total costs of operating the building, aren’t reflected on a business’s balance sheet as long as the lease has been in effect. 

Final Thoughts

Buyers will inevitably seek a solution out that will provide value at a price they’re willing to pay. Equipment with a higher specification is something that you might be able to afford than you first thought if you spread the cost by using asset finance. Asset finance increases the ability of individuals and businesses to tailor a solution that will surely meet their requirements.

You may be interested in: “The Importance of Finance for Business”