“Asset finance” is a term that is broadly used in business.
As a result, it can occasionally mean different things to different people. That, in turn, may cause some misunderstanding, so in what follows we will explore the various sub-themes arising from this term.
Strictly speaking, the term is used to indicate how the acquisition of a new asset is funded.
Let’s say a building company wishes to purchase a new JCB. They may approach a financing company to seek asset finance in order to help them make the purchase.
The actual products offered may vary. Perhaps typically they will include something like Hire Purchase (HP) but there might also be options including finance leasing and operating leasing.
This term typically implies a company is seeking to raise capital using one of its existing assets, or perhaps more correctly any equity they have in it, as some form of collateral.
To use the same illustration as above, perhaps the building company owns a £100,000 piece of machinery on which they have outstanding finance to settle of £30,000. That gives them a rough figure of £70,000 equity that they can potentially use to borrow against, by discussing the position with a specialist in asset refinance.
This method is normally used in the same fashion as “asset refinance” but might more typically include assets that are 100% owned and which are being offered as some form of collateral for other forms of borrowing.
Asset bookkeeping (including depreciation)
This is an accounting term that essentially describes how the value of an asset reduces over time in the company’s books of accounts and how the costs of acquisition are processed.
The various options here needn’t concern us and neither do the accounting technicalities. What is important to recognise is that the method used to finance the acquisition of an asset may directly influence how depreciation/cost will be handled in your accounting.
This can have an effect on things such as your profit and loss reporting and your balance sheet. There may also be taxation issues.
If you are considering purchasing a major asset for your company, it is always advisable to discuss the position with your accountant in advance. They may be able to give you important advice relating to which method of asset finance might be most suitable for you, at a given time, from an accounting viewpoint.
Asset book value and asset disposal
The asset book value is again an accounting term used to indicate the notional value of your asset at a given time.
Asset disposal is, as the name suggests, simply the mechanism you might use for selling or otherwise disposing of an asset when it is no longer required. This may be linked to asset finance in the sense that if you have an asset that is not 100% owned by you, as is the case with HP agreements where you are still making repayments, you must not sell it without the finance provider’s advance permission.
Assets that you’re still making payments against are not your property. To sell them without due advance permission might be considered to be a prosecutable offence.
How you finance your assets and account for them can at times be complicated. There may be no absolute right or wrong solution, only what might be most advantageous to your company at a given time.
It would be advisable to speak to your accountant and a specialist provider of asset finance to understand more if you are considering acquiring significant assets for your business.