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Asset finance has become a popular financing option for businesses seeking to acquire essential assets for their operations. Asset finance includes a range of financial solutions that allow businesses to acquire assets, such as machinery, vehicles, or equipment, by spreading the cost of a set period. This article will explore the legal benefits and drawbacks to business owners of utilising asset finance within newly purchased UK businesses.
1. Improved Cash Flow Management
One of the primary advantages of asset financing is its positive impact on cash flow management.
Instead of making an upfront payment for the entire cost of a business asset, businesses can spread the payment over a specified period. This approach allows businesses to:
- preserve their cash reserves; and
- allocate funds to other critical areas such as marketing, expansion, or working capital.
By avoiding significant capital outlays, businesses can maintain liquidity and navigate unforeseen expenses more effectively.
2. Enhanced Purchasing Power
Asset finance enables businesses to acquire essential assets that may have been otherwise unaffordable.
By securing asset financing, businesses can access higher-quality new equipment, machinery, or vehicles, which can positively impact productivity, efficiency, and competitiveness.
This increased purchasing power allows businesses to stay up-to-date with the latest technology and equipment, giving them a competitive edge in their respective industries.
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3. Flexibility and Customisation
Asset refinance solutions offer flexibility and customisation options that suit the unique needs of individual businesses.
Asset finance companies typically tailor finance agreements to match the specific requirements of the new assets being financed and the business’s financial situation. This flexibility extends to repayment terms, which can be structured to align with cash flow patterns or seasonal fluctuations in revenue.
Additionally, depending on their preferences and long-term goals, businesses can choose from various financing options, such as hire purchase agreements, finance leases, or operating leases.
4. Tax Benefits
Asset finance can provide tax benefits to businesses, contributing to overall cost savings. In some instances, lease payments may be fully deductible as operating expenses, reducing the taxable income. Furthermore, through finance lease arrangements, businesses may be able to claim capital allowances on the leased asset, further reducing the tax burden.
However, tax implications vary based on the specific asset, financing structure, and applicable tax regulations, so you should consult with expert lawyers to fully understand potential tax advantages.
5. Cost of Asset Finance
One of the primary drawbacks of asset finance is the overall cost involved. Financing assets typically incur regular payments of interest fees, increasing the total expense compared to purchasing assets outright. The interest rates for asset finance can vary depending on factors such as:
- the asset type;
- the creditworthiness of the business; and
- prevailing market conditions.
Additionally, some financing options may require an initial deposit or down payment, further impacting the overall cost. Businesses should carefully assess the long-term financial implications and compare the total costs with alternative financing methods.
6. Potential Ownership Restrictions in Asset Finance
Asset finance options like operating leases do not provide ownership rights to the business. This means that the physical assets remain the property of the finance provider throughout the agreement term.
This business loan arrangement can provide flexibility as the business can return or upgrade the asset at the end of the term. However, it may limit the ability to use the asset as collateral for other financing needs.
7. Commitment to Long-Term Asset Finance Agreements
Asset finance typically involves long-term agreements, often ranging from three to seven years, depending on the asset’s lifespan and value. While longer-term agreements can offer lower monthly payments, they require businesses to commit to a fixed payment schedule over an extended period.
This commitment may restrict the business’s ability to adapt to:
- changing market conditions;
- technological advancements; or
- unforeseen circumstances that require asset upgrades or replacements.
Early termination of such agreements may also incur penalties or additional costs.
8. Potential Depreciation Risks
Certain assets, such as vehicles or technology, can be subject to rapid depreciation. Over time, the value of these assets may decline significantly, potentially leading to a situation where the outstanding finance balance exceeds the asset’s worth.
This depreciation risk can expose businesses to financial losses if they need to sell or upgrade the asset before the end of the finance agreement. To mitigate this risk, companies should consider the asset’s expected lifespan and resale value before committing to asset finance.
Key Takeaways
Asset finance offers numerous advantages for UK businesses looking to acquire essential assets while preserving cash flow and enhancing purchasing power. The flexibility and tax benefits of this method of financing make it an attractive financing option for many businesses. However, it is crucial to consider the potential drawbacks and conduct thorough cost-benefit analyses.
If you need legal assistance utilising asset finance for UK business purchases, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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