What is Asset Finance?
Lease Rental or Hire Purchase agreements are types of asset finance, which companies can use to buy brand new assets or refinance existing assets.
Asset finance can be used for almost all tangible assets. For example, vehicles and wheeled equipment, plant and machinery amongst other items.
It is a vital tool for many organisations as it enables them to purchase equipment or release equity from existing assets already owned.
Companies looking for cost-effective ways to purchase assets or purchase assets without impacting on existing cash flow use asset finance as it is a reasonably easy way to increase company funds and protect cash flow.
When using this type of loan, the amount you can borrow is limited to the value of the asset being purchase or refinanced. A lender will not agree to any amounts over the current market value unless they can get security with other assets or property.
For refinanced assets, the value is not the original purchase price but the current market value. Assets, in almost all cases lose value over time, this is known as asset depreciation. Depreciation is the amount of value an asset loses overtime due to usage and age. Lenders will generally provide a desktop valuation or the assets a company is looking to refinance and then typically lend between 80% and 90% of that value. In some cases, lenders will use an external valuer to provide a third party valuation.
If you require more funding than you are eligible for using asset finance, there are other types of business loans that may be a better fit for your requirements.
What Types of Assets are Eligible?
The majority of companies will be able to use asset finance for most types of soft and hard assets.
Lenders will assess whether the asset(s) meets DIMS criteria
Asset Finance for New Purchases
Purchasing new assets is expensive and many businesses can struggle to fund purchases with existing cash reserves. Using finance to assist with an asset purchase can take the strain from company cash flow by spreading the cost of the assets into fixed monthly payments. Payments can also be spread over quarterly, biannually or annually payments in certain situations.
There are different types of asset finance available, including:
- Operating Lease
- Lease Rental/Finance Lease
- Hire Purchase
Refinancing assets can be a quick source of money for a business which owns assets to use as security. When refinancing assets, to decide on the value of the asset, a lender will either provide their own desktop valuation or a formal valuation by a specialist will be arranged by the lender before loan amounts are agreed.
Asset Finance Valuations - How Do They Work?
When determining asset values, the current market value of the asset and not the original purchase price are used in calculations. If you are refinancing existing or buying used assets, the current value is usually lower than the price you paid due to depreciation. As mentioned, this is determined by usage, wear and tear and age. Some assets retain value better than others and are less effected by depreciation, however this varies based on the type of asset as well as usage and condition.
Who can get Asset Finance?
Asset finance is open to any type of company looking to refinance or purchase new assets, subject to underwriting an acceptance. Conditions of approval may apply.
Lenders will look at several things when assessing your eligibility, such as:
- How long your business has been trading
- Company structure
- Financial status
- Outstanding debts
- Credit status
- Existing credit agreements
- Existing debt management
When purchasing new assets, you will be able get funding if you meet the lender's affordability criteria. This means you can afford the repayments on your loans based on credit status, outstanding finance agreements and company financial health. Lender's criteria differs between lenders and each lender can look at different criteria in order to asset the credit worthiness of a company.
If you are looking to refinance assets to release money tied up in your company assets, then you can take out finance lease or HP agreements to release equity held in those assets. You can even refinance assets which have outstanding finance payments on them, but the existing agreement would need to be paid off is some way.
What Documents do you Need to Provide?
There are a variety of documents you will need to supply when applying for finance.
- Company accountants
- Company bank statements
- Supplier quotations
- Commentary on what the asset will be used for and how it will benefit the business
When applying for asset refinance you will also need to consider the below.
- Proof of ownership of the equipment
- Original purchase price of the equipment
- Original purchase date of the equipment
- Condition of the equipment including mileage or hours used if applicable
- Aged debtor list
- Aged creditor list
- Personal net worth statements of the directors/significant shareholders