how does asset finance work?

Asset finance helps businesses acquire assets like equipment, vehicles, or property without upfront capital outlay. It involves borrowing money to purchase the asset, with the asset itself serving as collateral. However, it’s crucial to understand the various types and potential risks before committing.

What is Asset Finance?

Asset finance is a broad term encompassing several financing methods where the asset you’re purchasing acts as security for the loan. This differs from a personal loan, where your personal creditworthiness is the primary factor. Instead, the lender assesses the value of the asset and your ability to make repayments.

Types of Asset Finance

Several types of asset finance exist, each suited to different needs and circumstances:

• Hire Purchase: You make regular payments over an agreed period. Ownership transfers to you at the end of the term.
• Leasing: You pay a fixed monthly rental for the asset’s use. Ownership remains with the lender.
• Finance Lease: Similar to leasing, but you can claim tax relief on the payments. Ownership usually transfers at the end of the term.
• Operating Lease: A shorter-term lease, offering more flexibility, where you don’t own the asset at the end of the agreement.
• Chattel Mortgage: You take ownership of the asset immediately but use it as security for the loan. Repayments are typically made monthly.

How to Apply for Asset Finance

The application process generally involves:

• Identifying your needs: Determine the type of asset and the financing option best suited to your business.
• Finding a lender: Compare offers from different lenders to find the most competitive rates and terms.
• Providing documentation: You’ll typically need to provide financial statements, proof of identity, and details of the asset you wish to finance. A credit check is likely to be performed. Get your free credit search here. It’s free for 30 days and costs £14.99 per month thereafter if you don’t cancel it. You can cancel at anytime. (Ad)
• Approval and disbursement: Once approved, the lender will disburse the funds, and you can purchase the asset.

Eligibility Criteria

Eligibility criteria vary between lenders but generally involve:

• Creditworthiness: Lenders assess your credit history to determine your ability to repay the loan.
• Asset value: The value of the asset being financed is a critical factor. The lender will need to be satisfied the asset is sufficient security for the loan.
• Business viability (for businesses): For business finance, the lender will assess your financial performance and future prospects.

Risks of Asset Finance

While asset finance offers numerous benefits, it’s essential to be aware of the potential risks:

• Default: Failure to keep up with repayments could lead to repossession of the asset, legal action, and damage to your credit rating. Your property may be at risk if repayments are not made. This could involve legal action, repossession of the asset, and additional charges, such as increased interest rates.
• Interest rates: Interest rates can be high, particularly if you have a poor credit rating or are financing a higher-risk asset.
• Hidden fees: Be aware of any additional fees that may be applicable, such as arrangement fees or early repayment charges.
• Asset depreciation: The value of the asset may depreciate faster than the loan is repaid, leaving you with negative equity.

Choosing the Right Asset Finance Option

Selecting the appropriate asset finance option depends on your specific requirements and financial situation. Consider factors like the asset’s lifespan, your repayment capacity, and the overall cost of the finance.

It’s advisable to seek independent financial advice before making a decision. The MoneyHelper website offers valuable resources to help you make informed financial choices.

People also asked

What happens if I default on my asset finance payments?

Defaulting on payments can lead to repossession of the asset, legal action, and a negative impact on your credit score.

Can I use asset finance for personal use items?

While primarily used for business assets, some lenders offer asset finance for personal use items such as cars or motorhomes; however, this is less common.

What is the difference between a hire purchase and a lease?

Hire purchase gives you ownership at the end of the term, whereas a lease is for the use of the asset, not ownership.

How long does it take to get approved for asset finance?

Approval times vary depending on the lender and the complexity of your application, but it can typically range from a few days to several weeks.

Is asset finance suitable for all businesses?

Asset finance can be suitable for many businesses, but your eligibility depends on factors such as your credit history and financial situation.

What documents do I need to apply for asset finance?

You will typically need proof of identity, financial statements, and details of the asset you are financing.