Asset finance: What is it and why should new businesses consider it?
With start-ups often struggling to source capital, Stephen Jenkins of Tower Leasing believes this alternative finance option offers the solution
When it comes to investing in new equipment, there are plenty of options available to businesses in terms of how to fund this.
Since the recession, there has been an explosion of new lenders entering the small and medium business finance market as well as some incredible innovation in the types of products available.
Asset finance, otherwise known as asset leasing or lease rental, has been around for many years and for good reason, but not everyone is aware of how it can benefit them. This is what this article will look to explore…
Asset leasing is a tax-efficient and flexible way to purchase the equipment you need without compromising your cash flow, and is suitable for all industry sectors and any size of business. Terms are available from one to five years with only a minimal deposit required in most cases.
New start-ups often find it particularly difficult when sourcing capital: most funding sources are either wary of or outright refuse to deal with you unless there is a lengthy trading history and supporting financial information.
The asset finance industry, however, has long embraced the entrepreneurial spirit and has always supported start-ups and early-stage businesses, though quite often a homeowner guarantor is required for a company with less than three years of trading history.
The rise of asset finance
The UK leasing and asset finance sector is experiencing excellent growth as a result of its rising popularity, and has seen a year-on-year increase in its use for the last five years.
According to the FLA (Finance and Leasing Association), in 2016 the industry provided a staggering £30bn in finance to businesses and public services, the highest total since 2008. This represented just less than 32% of the UK’s investment in machinery, equipment and software.
Today, almost any tangible asset can be leased, from catering equipment, furniture, security, racking and storage to epos systems, IT and even 100% software. Broadly speaking, there is very little that cannot be financed this way.
As a general rule of thumb the items best funded on a lease rental agreement are those with short life spans and that normally depreciate quite rapidly.
The benefits of asset finance
When it comes to investing in capital equipment, there are extensive benefits associated with asset finance and asset leasing – though these are subject to your own individual circumstances – especially when compared to a cash purchase:
- 100% of the rentals (both the capital repayment and interest) can potentially be offset against your future, taxable profits.
- In the vast majority of cases leasing is an off-balance sheet transaction.
- Quite often no large deposit is needed.
- Repayments are fixed which makes for easy budgeting.
- Leasing maintains other credit lines.
- Flexible terms are available, from one to five years.
- There is an upgrade option for when you need to replace aging equipment with new.
- Almost all equipment types can be funded.
- Leasing allows the equipment to pay for itself over the time period.
- Arguably most important, asset leasing protects your cash flow to cover future unexpected costs or just to give you peace of mind knowing your money is in your bank account and not tied up in equipment.
Asset finance and the importance of cash flow
Some people believe that asset leasing or even just finance in general is only for companies who might be struggling or just don’t have the cash reserves to self-fund. This couldn’t be further from the truth.
Many FTSE 100 companies, as well as accountancy firms (who would know better?), have been found to use asset leasing in previous surveys.
Asset finance is also very common in the public sector, particular when it comes to the school system. Why use your own money when you can use someone else’s? It’s cliché, but cash really is king – especially in the early years.
Unfortunately, many small and medium businesses have ceased trading due to poor cash flow management and, in some cases, have been profit making at the time they had to shut up shop for good.
Above all else, a cash healthy cash flow is vital to help your new business grow and progress as without it you are in danger of choking your company. Time, then, to consider asset finance?
Stephen Jenkins is an account manager at asset finance firm Tower Leasing. Visit the Tower website here.