The British Business Bank announced that in 2023, new lending from the asset finance sector to UK small businesses grew by 7%, reaching a record high of £23.5bn! The ongoing provision of asset finance is clearly playing a significant role in helping businesses to invest and grow, a trend we’re expecting to see more of in the Channel Islands.
What is asset finance?
Asset finance is a way for businesses to purchase new equipment and machinery or expand their current operations without paying an initial large sum outright. Instead, companies borrow money to buy the asset, and the loan is paid back over time with interest.
Why businesses might consider asset finance
- Improved cash flow management: Asset finance allows businesses to acquire high-value assets without depleting their cash reserves. By spreading the cost over time through regular payments, businesses can manage their cash flow more effectively, ensuring that they have enough liquidity to cover operational expenses.
- Access to up-to-date equipment: Keeping pace with technological advancements is crucial for maintaining a competitive edge. Asset finance enables businesses to upgrade their equipment regularly without the burden of significant upfront investment. This access to the latest technology can enhance productivity and operational efficiency.
- Fixed payments and budgeting: Asset finance agreements typically involve fixed monthly payments, making it easier for businesses to forecast expenses and budget accordingly. This certainty helps in financial planning and reduces the risk of unexpected costs.
- Preservation of existing credit lines: Since asset finance is secured against the assets being acquired, it does not impact on a business’s existing credit lines. This allows businesses to preserve their traditional credit facilities for other uses, such as working capital or unexpected expenses.
- Capital raising: Businesses that already possess unencumbered assets can potentially use these to raise finance for further asset acquisitions.
However, as with all finance setups, there are drawbacks to asset finance to consider:
- While asset finance mitigates the need for a large initial outlay, the cumulative cost – including finance charges over the term of the agreement – can be higher than purchasing the asset outright.
- The lender retains ownership of the asset until the end of the financing term or until the final payment is made.
- Entering into an asset finance agreement commits a business to a series of payments over several years. If a business’s financial situation changes, these fixed payments can become a burden.
- The value of many assets, particularly technology and vehicles, depreciates over time. Businesses using asset finance may find themselves making payments on assets that have significantly decreased in value.
- Failing to keep up with repayments or adhering to the terms of the agreement could result in the finance provider repossessing the asset.
Asset finance presents a potential solution for businesses looking to acquire essential assets without the strain of substantial upfront costs. The benefits of asset finance make it an attractive funding option for many businesses but it’s important to weigh these advantages against the drawbacks to ensure that this represents the best solution. Businesses should conduct a cost-benefit analysis and seek professional financial advice to ensure this financing method fits with their long-term strategic goals.