A lot of new businesses struggle with the cost of buying assets outright. Whether it’s a car, office equipment or even machinery it can all be expensive and leave a sizeable dent in a business’s cash flow. For startups, who are usually working within a limited set of funds, all investments have to be spent correctly and buying brand new equipment or assets can leave a huge hole in cash flow. Even if a business has been trading for a few years, the cost of buying or replacing, assets or equipment can still lead to cash flow troubles.
Asset finance can be a brilliant way of breaking up payments on equipment and assets making it easier for businesses. Instead of spending a large amount of money buying assets outright, essentially, this form of finance effectively allowing a business to pay monthly fees over a set amount of time to cover costs.
Hire purchase and leasing come under the bracket of asset finance, which is actually a general term used for several methods of financing. Most methods of asset finance are similar, but they all have slight differences. Hire purchase and leasing are generally the two most common, the pair of them allow businesses to pay monthly fees for the assets or equipment. The exact details of these agreements would depend on the deal which gets put in place with the lender. The main difference between hire purchase and leasing, is that payments made towards a hire purchase agreement, result in the business automatically owning the asset at the end of the contract. In regard to leasing, instead of a business owning the asset at the end of a contract, the business would have options to return it, upgrade it, or pay off the remaining debts and legally own the asset.
What are the pros and cons of asset finance?
Pros
- Asset finance can provide businesses with a manageable way of purchasing assets and more effectively handling their cash flow
- Without the need for one large pay-out, it means businesses can get top of the range equipment, which they might not otherwise have been able to afford
- As payments are made in instalments, it enables predicting cash flow and forecasting much easier. With budgeting being made simpler, it gives businesses greater scope for development and growth
- If you lease an asset, the leasing company would be able to carry out maintenance and repairs on the asset.
Cons
- Some of the contracts related to asset finance can be long and last several years, during which time there could be new, or improved equipment available in the market
- Any failures in payment of the monthly amounts agreed, could result in any assets being repossessed
- If unfortunately, there are any damages to an asset, or anything is stolen, the insurer in the asset finance deal may not cover the whole cost, with the business normally having to cover the shortfall
- Any late payments or failures in payments, can result in a negative effect on a business’s credit score
With any business, cash is king. It is the life flow of a business and negative cash flow is one of the most common causes of business closure. Asset finance can be great for easing up some of those pressures and making forecasting that much easier. Planning ahead and maintaining a healthy level of cash flow is so important to a business’s success.
On the negative side, asset finance deals can be long and with the added cost of interest, any business who decides to go down this route will naturally end up paying more for equipment. Having an asset finance contract can also hold you down as a business, which can be especially frustrating if you want to try out new equipment.
For some businesses asset finance can be a brilliant way of getting top of the line equipment, whilst also more effectively managing their cash flow. However, for some it can be too long and be too restrictive to a business that wants to move forward.
