Asset finance is a way for companies to use their assets such as PP&E, inventory and accounts receivable to secure funds. These can be pledged against loans to increase short-term cash flow or growth funding. This is often used by start-ups and smaller businesses that may not have a strong enough credit history to secure a loan through a bank or other lender.
Unlike traditional financing where the bank’s perception of a company’s creditworthiness and future business prospects determine its lending limits, asset finance companies uk providers base their approval on the actual assets being financed. This allows for much quicker and more flexible lending arrangements and can help small and medium-sized companies that struggle to raise the funds they need from a bank or other lender.
As with all financial products, asset finance comes with plenty of small print and it’s important to always read this carefully. If you don’t, then any problems that arise could have an adverse impact on your business. In particular, it’s a good idea to find out whether the provider is regulated by the Financial Conduct Authority, as this will give you extra peace of mind.
Most of the asset finance providers will offer a variety of financing options including hire purchase, sale and leaseback and refinance/capital release. For instance, a start-up business that requires specialist machinery may benefit from the hire purchase agreement where the cost of the equipment can be broken down into manageable monthly payments. This will also allow the start-up to avoid upfront costs and save on working capital. The equipment is then returned to the finance company at the end of the term or a new payment plan can be agreed.
The finance provider will usually take responsibility for the maintenance and repair of the equipment or vehicle throughout the term of the contract. Depending on the agreement, they may even take over ownership of it at the end of the term. This can be a great option for a growing business, especially when it’s difficult to predict when they might need to replace an existing piece of equipment.
A business can also gain a tax advantage by using asset finance to purchase or lease machinery and equipment. All lease payments can be claimed as a deduction against profits, which can be far more beneficial than buying an asset outright and writing it off over time.
It is possible to start an asset finance company but it is important to ensure you register your business with the Reserve Bank of India. Failure to do so will lead to fines and penalties and can result in prosecution in a court of law. During registration, you will need to submit your bank statements as proof of the company’s ability to make repayments as well as detailed information on all directors and shareholders. Lastly, you will need to have detailed knowledge of the market and the potential customers that can be targeted by your asset finance company.