How Asset Finance can Grow your Business
There is a good reason why asset finance has in the last couple of decades become the financing method of choice for all types of businesses, but especially SMEs (small and medium-sized enterprises). Businesses need to buy equipment and other capital assets in order to grow, but this can have a major impact on both cash flow and credit lines. At the same time, obtaining loans from banks has become next to impossible since the recession, especially for newer start-ups.
For many businesses, asset finance is not only easier, but is actually a preferable alternative to bank loans. With this type of finance, you as the business owner make a contract with a leasing company, which purchases the asset you require and leases it to you for an agreed monthly payment. In many cases, you can actually make the payments from the income generated by the asset.
There is a very wide range of assets that can be purchased through this method. They include heavy plant and engineering or printing machinery, office, medical, farm or construction equipment, and vehicles including vans, buses and coaches. In fact, asset finance can basically fund anything that is tangible, provided it will not be converted into cash — that is, used as stock.
Under a leasing agreement, you don’t normally own the asset — you are effectively renting it from the leasing company. At the end of the leasing period you usually have the choice of returning the asset, purchasing it, or extending the lease. There is an alternative form of asset finance — hire purchase — which you can use if you wish to own the asset at the end of the period.
There are huge advantages in using asset finance to lease a major piece of equipment, as opposed to borrowing money to purchase it outright. Almost every type of equipment depreciates, and becomes out of date very quickly, so by purchasing it you actually lose money, and then have to find more to replace the item. By leasing, you can return the asset to the lessor and make a new agreement.
The other major advantage is that all lease payments can be offset against your taxable profits, and this can considerably reduce your tax bill. This is because lease payments are regarded as a business expense. On the other hand, if you borrow money and purchase outright, it is only the interest that can be set against tax.
In addition, because an operating lease is classed as an expense, not as a debt, it has no effect on your credit rating, and you can keep your borrowing options open for other purposes. Also, unlike bank loans and overdrafts, the facility can’t be suddenly withdrawn, so you can feel secure enough to concentrate on your business. There are no variations on interest rates as there are with loan repayments, so your budgeting and cash flow are much more straightforward, and no security is required apart from the asset being financed.
Asset finance is particularly useful in times of recession, when the temptation is for businesses to cut back on expenditure. This often means that equipment deteriorates and depreciates to such an extent that it costs a huge amount to replace — which in turn means that when recovery comes, the business is not in a position to take advantage of it. With asset finance, you can upgrade assets regularly and always have up-to-date, efficiently functioning equipment — so you are flexible enough to take advantage of changing economic conditions.
Asset finance is in fact one of the most effective ways of financing the equipment you require. Many businesses are waiting for the recovery to speed up before making investment decisions. By using asset finance, you can move ahead of the competition and take advantage of the improving market.
Check out the wide range of services offered by funding solutions for your business, everything from invoice finance, asset finance and invoice discounting.