If there’s one thing that small and mid-tier businesses struggle with, it’s acquiring new assets. The reason? It’s budget constraint (no surprises here!)
Fortunately for them, asset finance solutions have emerged as a crucial method for companies to acquire the necessary equipment, machinery, and other assets required for their operations.
For the uninitiated, asset finance involves obtaining funding to purchase or lease assets, with the assets themselves often serving as collateral for the financing. For example, finding horsebox funding solutions in UK is no longer a hassle.
Although this approach offers numerous benefits, it also comes with its share of drawbacks. So, without further ado, let’s get to know the pros and cons of asset finance solutions:
Pros and Cons of Asset Finance Solutions
Preservation of Capital
One of the most main benefits of asset finance solutions is that they enable businesses to conserve their capital. Rather than tying up large amounts of money in purchasing expensive assets upfront, companies can opt for financing options. It allows them to allocate their funds to other critical areas of their operations, such as marketing, research, and development.
Access to Latest Technology
Technology is evolving at an unprecedented pace, particularly in the manufacturing, healthcare, and information technology sectors.
Asset finance solutions provide businesses with the means to access the latest equipment and technologies without bearing the full cost of acquisition. This not only enhances operational efficiency but also keeps the company competitive in the market.
Flexible Payment Options
Asset financing offers flexibility in terms of payment options. Businesses can choose from various structures such as leases, hire purchase, and equipment finance agreements. This flexibility allows companies to tailor their payment plans according to their cash flow and budgetary constraints.
In many regions, asset finance solutions offer potential tax benefits. Depending on the specific arrangement and local tax regulations, companies may be able to claim deductions on lease payments or depreciation expenses, thereby reducing their tax liabilities.
In rapidly changing industries, owning assets that could quickly become obsolete can be a significant risk. Leasing or financing assets allows businesses to transfer this risk to the finance provider, who retains ownership at the end of the lease term.
Preserved Credit Lines
By opting for asset finance, companies preserve their existing lines of credit with banks and financial institutions. This ensures that these credit lines remain available for other business needs, such as short-term operational expenses or unforeseen emergencies.
While asset finance solutions provide immediate access to assets, they often come at a higher cost compared to purchasing assets outright. This is due to the fact finance companies charge interest on assets, depending on the asset finance option. Also, asset finance brokers also charge a commission.
So, over the course of the financing arrangement, businesses may end up paying more than the asset’s market value due to interest rates and fees.
In cases of leasing or rental agreements, the company does not own the asset at the end of the agreement. While this might be advantageous for rapidly depreciating assets, it also means that the company does not build equity in valuable assets over time.
Dependency on Third Parties
Asset financing involves dealing with external finance providers. This introduces a degree of dependency on these entities. If the finance provider faces financial difficulties or undergoes changes in its terms and conditions, it could potentially impact the lessee’s ability to access and use the assets.
Potential for Complex Terms
Getting heavy machinery finance can sometimes be complex, especially when dealing with specialized equipment or intricate leasing structures. Misinterpretation of terms or failure to thoroughly understand the agreement can lead to unexpected costs and legal disputes.
Impact on Balance Sheets
Depending on the accounting standards followed, certain asset finance arrangements can impact a company’s balance sheet.
For example, capital leases are recorded as assets and liabilities on the balance sheet. This could potentially affect financial ratios and key performance indicators.
Lease or financing agreements typically come with fixed commitment periods. If a business’s needs change during this period, it may be challenging to exit the arrangement without incurring significant penalties or costs.
To sum it up, while there are both pros and cons to getting asset finance options, the former certainly outweighs the latter. If you are tactful enough and make an informed decision vis-à-vis the selection of asset finance option and the related terms, there isn’t much to lose.