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 and machinery, inventory, savings, accounts receivable, patents, trademarks, jewellery, 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, thereby increasing your working capital. The repayments are fixed; thus the financial structure of your business remains unchanged during fluctuation in interest rates. With fixed repayments, budget planning and cash flow forecasting are made simpler. In an economic crisis, the refunds are made flexible and adjusted accordingly.
Availing finance on your existing equipment is known as refinancing, which can be used for the company’s growth. Usually, 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 These agreements once executed cannot be withdrawn; hence, a certainty of credit is assured.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 understanding, you choose the equipment you require and also the vendor. The asset financing company pays the provider. According to the repayment plan, as mutually agreed upon, you repay the cost of the equipment over a period, 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 arrangement is similar to the Hire Purchase Agreement. The difference is that the material 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 stuff 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 duration, and once the minimum time is over, the equipment is returned to the finance company without any extra cost.
If your business qualifies for an asset-based finance agreement, some finance companies can even extend factoring facilities to increase your cash flow further; thereby, empowering you to manage the initial painful months with confidence.