Asset Finance
In the context of finance, an asset is any material owned by an individual or a company, which has a cash value. An asset can be real estate, plant & machinery, inventory, savings, accounts receivable, patents, trademarks, jewelry, or financial instruments like bonds and equity, etc. Some Banks and finance companies offer finance against such assets, which is known as asset-based financing, and the finance thus received, is known as asset finance or asset-based finance.
Why Choose Asset Finance?
To buy capital equipment, a budget may be difficult to mobilize for growing companies. With the help of asset finance, immediate purchase and use of the equipment is possible, leaving the other lines of credit undisturbed. Maximum finance is availed as the entire cost of the equipment is met by the asset finance. The repayment is made from the income that the usage of the equipment generates over a period of time, thereby increasing your working capital. The repayments are fixed; thereby the financial structure of your business remains unchanged during fluctuation in interest rates. With fixed repayments, budget planning and cash flow forecasting is made simpler. In an economic crisis, the repayments are made flexible and adjusted accordingly.
Availing finance on your existing equipment is known as refinancing, which can be effectively used for the company’s growth. Normally three types of agreement, namely, hire purchase, finance lease, or minimum term agreement are made for extending asset finance for new and existing equipment, preferably with identifiable serial numbers. These agreements once executed cannot be withdrawn; hence, a certainty of credit is assured.
Hire Purchase Agreement
In this type of agreement, you choose the equipment you require and also the vendor. The asset financing company pays the vendor. According to the repayment plan as mutually agreed upon, you repay the cost of the equipment over a period of time, typically ranging from 2 to 5 years or 7 years for assets which have a longer life. At the end of the repayment plan, you own the equipment.
Finance Lease Agreement
This type of agreement is similar to the Hire Purchase Agreement. The difference is that the equipment belongs to the finance company. You have three options, namely, to return the equipment to the finance company, to continue using it against secondary rental, or to sell the equipment at market value. Some finance companies will repay you the major part of the sale proceeds.
Minimum Term Rental Agreement
Similar to finance lease agreements, here the equipment is rented for a minimum term, and once the minimum term is over, the equipment is returned to the finance company without any extra cost.
If your company qualifies for an asset-based finance agreement, some finance companies can even extend factoring facilities to further increase your cash flow; thereby, empowering you to manage the initial difficult months with confidence.
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