Asset financing is a smart way to spread the cost of asset acquisition without disrupting cash flow, but these benefits come with certain financial risks. This blog discusses the benefits and limitations of asset financing.

What is a business asset?

Business assets are properties owned by a business. Anything that your brand owns that represents a financial value is called an asset. Please note that this value might change over time. The two kinds of business assets are:

• Tangible assets – these assets are physical resources directly connected to your work, such as raw materials, inventory, office supplies, land, buildings, vehicles and cash.
• Intangible assets – these assets lack physical form but still consist of monetary value. They include patents, goodwill and trademarks.

What is asset finance?

Asset financing in the UK is an unsecured funding method to purchase new business assets by spreading the cost of acquisition. The asset acquired itself serves as collateral, improving chances for businesses to secure it more conveniently than unsecured business loans. Asset finance does involve a down payment upfront, and it does not disrupt cash flow, which is necessary to meet everyday business expenses.

Pros and cons of asset financing

Asset financing is a powerful tool for businesses to acquire equipment without high upfront costs, but it is subject to some risks as well.

Upsides

• You get fixed payments with asset financing. It significantly brings stability in cash flow because you make fixed repayments over time to your asset finance provider. Your business does not have to grind to a halt due to heavy repayments.
• Accessibility to funds is faster compared to unsecured business loans, which involve loads of formalities and paperwork. During emergencies, quick access becomes a lifeline for a business.
• Instead of paying the acquisition cost outright, asset finance helps spread the cost, preserving working capital for everyday business operations.
• Your credit history is important, but most asset finance providers emphasise the resale value of assets, making it easier for startups and SMEs with slightly damaged credit histories.
• Interest payments in some agreements and lease payments can be tax-deductible, reducing overall liability.

Downsides

• If you, by any chance, fail to repay the loan or default on it, your asset will be repossessed by your lender. 
• While upfront costs are reduced, interest payments over time significantly increase the cost of acquisition. This is undoubtedly more expensive than an outright purchase.
• Some agreements are subject to ownership limitations. At the end of the contract, you will have to return the asset or replace it.
• If the damage to the asset is not covered by maintenance or servicing, then your asset finance company or lender may not bear the expenses. You will have to bear these expenses from your own funds.  

To conclude

At the time of considering asset financing, make sure that you have researched and explored other options as well. Chances are unsecured business funding proves to be a better solution. Consult a broker for better guidance. They will provide guidance after identifying your business needs and position.

FAQs

1. What are the eligibility requirements for asset finance in the UK?

To qualify for asset finance in the UK, your business:

• Should have a trading history of at least 6 months.
• Should have reached the break-even point and started making profits.
• Should demonstrate stability in cash flow.
• Must have a decent credit history. Some providers might consider a personal credit score too.
• Must be able to put down a deposit.

2. Can I get asset finance with bad credit?

Yes, it is possible to qualify for asset finance with bad credit, but expect stricter terms and conditions.

• Most asset finance providers will charge high interest rates.
• They will require you to pay a larger deposit upfront.
• Repayment schedules might be shorter.

Since the asset itself serves the purpose of collateral, lenders will be concerned about the resale value of the asset rather than just your credit score.

3. Can startups get asset finance in the UK?

Yes, startups can get asset finance in the UK, but it is more challenging than for established businesses. Approval depends on the asset type, your credit history and the asset serving as collateral. Because the asset purchase serves the purpose of collateral, qualifying for asset financing is easier for startups than unsecured business loans.

4. Can small businesses qualify for asset finance?

Yes, in fact, asset financing has been designed to help small and medium enterprises. They are more flexible than unsecured business loans because a secured asset mitigates the risk for lenders. There is a possibility of getting approved for it despite a low trading history.

5. How much money can I get through asset finance?

Most of the providers will finance up to 80% of the market value of the asset being financed. However, there are many factors that influence the decision of lenders. They include:

• Turnover
• Cash flow
• Trading history
• Deposit

6. How quickly can I get asset finance for my business?

You can get asset finance for your business within two to three days. However, this timeframe might extend to a week or longer if you apply for it from a traditional bank.

7. What documents are required to apply for asset finance?

You will need the following documents:

• Proof of business registration such as a Companies House Certificate
• Director identification such as your passport or driving licence
• Recent bank statements
• Tax returns
• Statement of assets and liabilities
• Profit and loss statements
• Asset specification

Lenders may ask you for other documents as well.

8. How do I apply for asset finance in the UK?

Follow these steps to apply for asset finance in the UK:

• Start making repayments
• Figure out what asset you need to acquire
• Choose a lender by comparing options
• Arrange all documents needed
• Submit an application
• Wait for approval
• Sign the agreement
• Start making repayments