How asset finance can help grow your business

How asset finance can help grow your business

By Wesley Harfield, Investec Asset Finance

The cash flow implications of investing in new equipment or machinery can be daunting for any business and, in particular, for SMEs. Whether you are a caterer whose ovens and refrigerators are on their last legs, or a delivery company whose fleet of vans simply cannot keep pace with growing demand, ensuring that you have the right tools for the job is critical to your success.

Indeed, capital expenditure is important, not only for maintaining customer service and seamless day to day operations, but for enabling your business to grow. A manufacturer cannot meet increased demand for its products without investing in additional capacity. But while the economic benefits of expansion may be obvious, funding that expansion may sometimes appear more challenging.

What are my options?

Many SMEs have limited working capital available for major outlays such as new machinery or equipment. And capital adequacy rules mean that lenders are increasingly moving away from traditional overdraft facilities.

Smaller businesses will typically retain any headroom in their overdraft for routine overheads and supplier costs.

Accessing a bank loan to fund the purchase may also prove difficult for many SMEs, who may not have the necessary credit worthiness to qualify. Even if it is possible to obtain a loan, companies may be reluctant to use up a large chunk of borrowing capacity already earmarked for anything from payroll to VAT.

Asset finance, however, allows a business to fund the acquisition of equipment vital to the smooth running or growth of that enterprise, while keeping existing facilities intact. Because lenders take security in the asset being purchased, the business can protect existing credit lines, while freeing up cash.

How does it work?

Asset finance enables a business to benefit from immediate access to the new equipment required, whilst spreading the cost over the useful life of that asset.

There are two ways in which this will typically work:

  • Hire purchase. Hire purchase is a simple way to gain ownership of an asset while spreading the cost of that asset over time. As a business, you will pay in instalments, typically with a higher amount upfront and the remainder spread across the term of the agreement at a fixed interest rate. The item will appear on your balance sheet and, as such, you are responsible for maintenance and insurance. The advantage is you will gain full ownership of the asset at the end of the term.
  • Asset leasing. Alternatively, the lender may buy the asset you require and lease it back to you. Typically, you will pay the first month’s rental upfront, with the initial outlay lower than for hire purchase. The asset will appear as a leased asset on the company’s balance sheet, with the rentals showing as obligations under finance lease. At the end of the leasing contract you can either continue leasing or upgrade to new equipment. If, at the end of the term, your delivery business has grown significantly, you can lease a larger van or source a package deal across multiple vehicles.

The application process for obtaining asset finance is relatively simple. Lenders will be looking for the same business fundamentals as if they were preparing to issue a traditional term loan. The lender will want to see evidence that the asset being acquired will benefit the company, by increasing efficiency, increasing production or reducing costs. They will look at affordability of repayments, based on existing and projected trading, and they will look at the company’s overall balance sheet, including ability to service existing borrowings and depth of resource to generate cash to make payments if required.

A business is free to turn to any bona fide supplier, and asset finance can be used for both new and second-hand equipment. Payments can be structured to take account of seasonal cash flow fluctuations.

Furthermore, excess liquidity in the market means pricing in the current environment is highly attractive. Funds can also be in place very quickly. Financing of up to £250,000 can be secured in less than four hours.

Once a deal has been struck, meanwhile, the business has complete control and use of the asset throughout the term of the loan. There are none of the financial covenants that could trigger repayment demands with other forms of lending. The asset financier cannot call the loan unless the business fails to meet its basic payment requirements.

Why asset finance?

Asset finance is a proven and stable form of funding that has been around for hundreds of years. Members of the Finance and Leasing Association lent £32bn in 2017,1 an increase of 5% on the previous 12 months. Demand from SMEs, in particular, is growing.

Nonetheless, the significant benefits that asset finance can bring are still being missed by many smaller organisations, who may simply be unaware that there are viable alternatives to basic credit lines.

Businesses also sometimes wrongly believe that asset finance is the preserve of heavily geared construction or plant hire companies. In reality, it can be a compelling tool for any business looking to acquire any type of capital equipment.

Indeed, asset finance can be used across almost any sector and for a wide variety of purposes, ranging from investment in manufacturing tools to IT hardware, photocopiers or even coffee machines.

For any business that needs to update or expand its equipment-base to protect market share or grow, asset finance provides the immediate benefits of access without the upfront cost. For an SME, that means the ability to harness your growth ambitions without compromising either existing banking relationships or cash flow. It is a highly effective, cost efficient, form of funding that is too often overlooked.

 

Benefits in brief

  • Immediate access to equipment or machinery required with cash flow preserved by spreading cost over useful lifetime of the asset.
  • Lenders security over asset means existing credit lines are unaffected.
  • Any bona fide supplier can be used. Applies to new or used assets.
  • Repayments can be structured to take seasonal cash flow fluctuations into account.
  • Simple application process and speedy access to funding.
  • Very cost effective in current environment.
  • VAT deferred with hire purchase or spread over term with asset leasing. Interest and depreciation offset.
  • Ability to refinance equity in existing assets

 

Note:

1 According to the Finance and Leasing Association.

 

Author:

Wesley Harfield

Head of Investec Asset Finance Sales

Investec Asset Finance

Reading International Business Park

Reading

Berkshire RG2 6AA

UK

Tel: +44 330 123 9614

Email: iafbrokersupport@investec.co.uk

Website: www.investec.com/assetfinance