Asset Finance
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Asset Finance
Kal Woodley from Grand Union Financial talks us through asset finance.
What is asset finance?
It’s essentially a loan for business purposes to help you purchase or refinance an asset based on its current market value. The lenders take depreciation factors into account. They look at the type of asset, the location and what you’re going to use it for.
In short, asset finance is a loan that helps you purchase or refinance an asset for business or commercial purposes.
What types of asset finance are there?
There’s a wide variety. We can classify it into two types – intangible and tangible assets, or hard and soft assets. Hard assets that are quite common with my manufacturing clients are press machines, manufacturing benches and injection moulding machines. Lorries, trucks and haulage equipment are typically classified as hard assets.
Soft assets are where the perishability is quite high. A recent client of mine was setting up a gym and they needed punching bags, dumbbells, barbells etc, which sit on the soft asset side.
It goes further. You’ve also got green assets. For example, manufacturing companies and warehouses are looking to reduce their cost per square footage and improve energy efficiency. They’re installing solar panels and seeing that their fixed or variable costs are starting to come down as they become more efficient.
You’ve even got digital assets – people are talking about non-fungible tokens for example.
Certainly software is a digital asset, and there are software leasing companies and lenders that will help you operate MRP or your ERP software to help your business function.
There’s quite a variety of assets out there, grouped in tangible and intangible, hard and soft, green and digital.
What is the difference between a loan and asset finance?
They are essentially the same. Asset financing is a type of secured loan, leveraged against the asset itself, taking into account its depreciation, saleability and overall risk profile.
When some lenders look at saleability they want to know that if they have to repossess that asset it can be put back on the market. Is there another potential buyer for it? If the saleability isn’t high, some lenders won’t be interested but, on the other hand, some lenders will finance you to build a bespoke machine. It all depends on what you’re looking to achieve and the details of the asset you’re interested in.
What are the advantages and disadvantages of asset finance?
The marketplace for sourcing asset finance is quite diverse and open. There’s a lot of choice and variety. Many lenders will lend across the board on all different types of tangible and Intangible assets. That’s a really huge advantage to borrowers.
Another advantage is that sourcing and actually drawing down on asset finance is relatively quick. The underwriting process is very fast – it’s almost similar to buying a car. People often have PCP contracts and hire purchase contracts that are typically underwritten and completed on the day.
It can be a little more complicated when you get into more complex pieces of equipment. But the timeframe to complete on asset finance is relatively quick compared to property financing.
The terms for asset finance typically range from one year to five years, with 48 months being typical. Some lenders will extend the loan to seven years with the right conditions – but that leads to steeper repayments.
Because it’s a shorter lending period, interest rates are a lot higher than with property finance. That may not just be related to the term. It could also be led by the overall risk factor of the asset itself. Where there’s variation in the risk, there’s variation in the rates.
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What are the financial benefits of asset finance?
Again, it’s a loan secured against a piece of equipment you want to buy. Before asset finance became the common route to borrow and buy assets, we would typically look at refinancing property to raise capital.
You don’t need to do that now. If you’ve got enough to put into the deal you can use asset finance. That way the loan stands on its own two feet and you don’t have to touch any of your other assets.
One financial benefit is that you secure the loan on the asset itself. It’s risk profiled and costed to pay off that asset. But when you come to refinance it for example, there’s another advantage in that you have an additional marketplace to access. That’s handy, especially if you want to keep the asset on board. You don’t need to go through the whole process of refinancing property. It’s there, it works, and it’s quite flexible compared to property finance.
How can a financial advisor like Grand Union Financial help?
We place asset finance day in, day out. We work with all different types and sizes of clients, buying assets of different shapes and values. We work with dozens of lenders from a huge sourcing panel – because not everyone’s case will fit with any lender.
We will explore all the options to give you the best overall cost. Whether it’s standard equipment or something perishable, we have the ability to place that. If it’s something more complex, as long as it fits into the overall business case we can help structure that for you.
