The term “asset finance” is one that is probably commonly used in the UK financial services industry.
Here’s a very quick overview and definition of it and related issues.
Using an expensive asset
If you’re looking for something such as a van or specialist piece of heavy machinery, then the chances are that it will come with a hefty price tag.
Some individuals and businesses may be able to pay that out of their cash reserves. That’s good in one sense but as many accountants will tell you, not necessarily the best use of your liquid capital.
More commonly, borrowing or other financing is required to help secure the use of that asset. Note the words “use” and “secure” above. That’s intentional because some funding systems will allow you to obtain benefit from the asset without actually buying it outright.
The various ways of funding your access to an expensive asset are referred to, unsurprisingly, as Asset Finance. However, that involves several different products and options.
A quick clarifier – asset re-finance
You might also encounter the term “asset re-finance”.
It’s simple – if you have equity (the sum left over if you deduct any outstanding loans or debts on the asset from its realistic market value) in an asset, you may be able to borrow up to a percentage of that.
That’s a very useful technique and one that may be beneficial and cost-effective. Many people consider this to be part of the domain of asset finance while others think it stands apart in its own category. It’s listed separately here just because it has a potentially confusing name!
Asset Finance – different approaches and products
To keep it brief and simple, here is a list of some of the more commonly encountered products often categorised under the asset finance heading:
- Hire Purchase (HP);
- leasing (operational and finance);
- contract leasing;
- business loans.
These options differ from each other in many important respects.
Some involve you, to all intents and purposes, renting the asset. Others may do likewise but with an option to purchase it at the end of the agreed term. Something such as HP results in the asset automatically becoming your property at the end of the term, assuming you have kept up all payments on it.
In all these cases, the asset remains the property of another party and you are using it in one legal capacity or another.
Direct loans are slightly different because there you use the money to purchase the asset at the outset but the lender will typically still have a legal charge over it, meaning they could seize it if you don’t maintain the loan repayments.
Which option is suitable for you?
All of the above products have their pros and cons. What’s suitable for someone else might not be so advantageous for you.
It’s very difficult to summarise these in isolation and it’s usually beneficial to take advice from an expert provider of asset finance. That’s because it will be important to understand the shape and nature of your business before speaking of suitability.
Some of the options above differ from each other principally, from a customer’s viewpoint, in their accounting treatment.
In some cases, these options may result in monthly payments that can be booked into and written off against your P&L. In other cases, they result in the asset being reflected in your capital asset register and depreciated on your balance sheet.
The tax implications can be complicated and that means you need to consider advice and guidance from a specialist provider and your accountant – unless you’re fully familiar with the accounting principles and taxation issues involved.