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How Much Does Asset Finance Actually Cost?
Asset finance has two main costs: interest rates and fees.
Interest rates vary depending on the market and base interest rate at the time, but currently sit between 6.87% - 15.04% per annum.
Fees will vary based on the lender you use, the exact product you take out and the terms of your agreement.
In this article, we break all of the calculations down in more detail, as well as other costs you might incur from asset financing.
And to get a bespoke quote for your requirements, use our calculator below:
Contents
Asset Finance - An Overview
The Financial Cost of Asset Finance
Asset Finance Case Studies
The Cost to Capital and Cash Flow
Asset Lifespan and Depreciation
Repossession - The Ultimate Cost of Asset Finance
The Benefits of Asset Finance
Asset Finance with Clifton Private Finance
Asset Finance - An Overview
Asset finance is an extremely cost-effective and popular way for UK businesses to raise the funds needed to purchase new assets, or to leverage existing assets to provide capital for expansion in other areas of the business.
Asset finance is an umbrella term for several specialist financial products that include:
One of the main benefits of asset finance is the lower risk it presents to the lender; by tying the loan to a tangible asset as collateral, the lender can proceed with confidence and security.
How easy is it to get asset finance, however, and what are the costs - both seen and unseen - to taking out an asset finance contract?
The Financial Cost of Asset Finance
Interest Rates
Like all loans, the primary financial cost of asset finance lies with the interest rate associated with the loans and when looking to asset finance, this is a core figure that drives consideration. Unfortunately, it is impossible to predict in advance what this may be.
Asset finance, such as hire purchase, and asset-based lending can have extremely low interest rates, with some lenders willing to consider loans from rates as low as 6% APR.
Though the risk is mitigated through the asset-as-collateral, asset-based finance is not completely disconnected from your business credit history. Credit ratings will be taken into account when determining final interest rates and businesses with extremely poor credit history could see interest rates rise to 40% or even higher.
In these cases, the collateral serves to provide the business with a loan facility at all, where normally it would simply be rejected.
A third substantial factor determining interest rates is the nature of the asset used as collateral. Ultimately, something that is easier to sell on and recoup value should it be repossessed is a ‘better’ guarantee than one that is more niche and requires a specialised market.
Thus, asset-finance leveraged against a car will command a lower interest rate than one tied to bespoke IT equipment.
As a whole, interest rate is affected by:
- The provider
- Type of asset finance
- Business credit history
- Type of asset used for security
- External factors, such as inflation and country-wide economy
Learn More: Full guide to asset finance interest rates.
Fees
Banks and other lenders will often charge arrangement fees when considering asset-based lending, while asset finance options such as finance lease may have early release fees and penalties based on the asset usage.
These following 3 fees should all be considered when calculating the overall cost of your asset finance.
Arrangement Fees
An arrangement fee is an administrative fee that is charged to cover the lender’s costs in assessing your loan application.
Because asset-based lending requires the lender to undertake due diligence and a valuation of the assets, arrangement fees are not uncommon in this type of lending. Arrangement fees for hire purchase or leasing agreements are rare, but may occur.
Early Repayment Fee
An early repayment fee may be charged when an asset-based contract is ended early by the borrowing business. This represents a portion of the interest the lender expected to earn over the course of the contract that they are now losing.
Early repayment fees exist in many asset finance contracts.
Asset-based Penalties
Asset based penalties occur typically at the end of leasing contracts when the asset is returned to the lender. These occur when the condition of the asset is lower than expected for reasonable wear and tear, or if it any restrictions have been broken.
An example of this is with car contract leasing, where an annual mileage limit will be applied to the vehicle. If the car is returned having exceeded this mileage limit, then a penalty will be calculated based on the excess mileage.
Insurance
When you take out asset finance, the ownership of the asset resides with the finance company. This means it is theirs and you are expected to look after it. Part of that responsibility means holding the correct insurance to provide risk mitigation should anything happen to the asset.
Comprehensive insurance for asset finance is obligatory and should be costed as part of your financial planning.
Maintenance
Like insurance, your business is responsible for maintaining the asset and keeping it a good condition.
While reasonable wear and tear is expected over the term, the word ‘reasonable’ is key. The asset must be regularly serviced, if relevant, and any damage done to it must be repaired.
This can mean that all service, repair, and maintenance must be done by a selected list of approved service engineers. One example of this is car leasing, where leasing companies have arrangements with a core group of garages that you must take your car to if something needs repair.
For ease, some asset finance contracts, such as contract lease, include a maintenance portion. While this does raise the cost of the lease and the size of your monthly repayments, it provides a ‘worry free’ philosophy to the arrangement with all maintenance undertaken by the leasing provider.
Monthly Repayments
The most significant financial cost of asset finance is, of course, the monthly repayments. Depending on the size of your asset finance and the length of the term, these may have quite an impact on your business’s monthly outgoings.
Asset finance contracts are often tight and specific regarding repayments, and failure to meet your obligations will result in the asset being repossessed (as detailed later in this article).
If you find yourself in a position where the burden of the monthly asset finance repayments are too great, it may be possible to refinance your arrangement.
Contact us at Clifton Private Finance for expert advice and solutions to discuss your options.
Asset Finance Case Studies
Read some of our most recent asset finance case studies below for real examples of how asset financing works in practice, from operating leases to hire purchase agreements:
The Cost to Capital and Cash Flow
How much does asset finance cost your business in other ways? The financial costs are clear, but what about other aspects of business management?
Asset Finance and Its Effect on Capital
Asset finance is typically considered to avoid placing a burden on capital when looking to obtain equipment or machinery, but though it is of great benefit, it does not reduce that burden to zero.
As described earlier, your business has a responsibility to keep the asset in prime condition throughout the terms of your lease, and sometimes this can mean paying for an unexpected repair or insurance excess.
Many lease arrangements also include a final ‘balloon’ payment at the end of the contract term, effectively an offset for capital spend, delaying the cost from the start of the contract to the end. It is easy at the beginning of an asset finance contract to see this balloon payment as far off into the future, but it will come around sooner than expected.
It is also important to have the capital available at the end of the contract for any penalties that may be due.
The Asset Finance Drain on Cash Flow
Asset finance is an excellent tool for spreading the cost of investing in equipment, machinery, or other assets. Similarly, asset refinance and asset-based loans can provide capital for expansion in other areas of the business.
However, while asset finance helps with removing the need for capital at the point of purchase, that cost does need to be repaid over time and thus becomes a constant drain on monthly business cash flow.
Managing cash flow is an essential part of running a business and projecting how your asset finance will impact your monthly cash flow is key to the successful use of asset finance.
This ongoing commitment to your cash flow can make it difficult to take advantage of future opportunities or to expand in directions that weren’t planned for at the start of your asset finance arrangement, making the drain on cash flow a hidden cost to the business in ways that are not purely financial.
Asset Lifespan and Depreciation
Assets are never permanent and over time will become less efficient and functional.
This may be through wear and tear, or it may be because the technology improves, rendering the asset's usefulness limited. While this is true of any asset investment, it can often be overlooked when considering asset finance.
Rather than a negative of asset finance, however, depreciation and asset lifespan are well considered in all asset finance arrangements. Leasing, in particular, has many options for the replacement or upgrade of assets both during and at the end of contract terms to mitigate some of the issues of technological improvements.
When planning on asset finance for your business, it is important to look at the usefulness and expected lifespan of your assets and make a decision regarding the specifics of your asset finance with those considerations in mind.
Repossession - The Ultimate Cost of Asset Finance
Repossession is the ugly truth of asset finance and can happen more often than expected.
In these instances, the finance company will exercise their right to take control of the asset and sell it to repay the remaining balance of the finance agreement, as well as any administration fees or penalties as part of the repossession process.
In some cases, repossession can result in the refund of some monies to the defaulting business. This can be if the balance of the finance agreement is smaller than the sale amount of the asset - essentially, if the repossession process results in profit.
These occurrences are rare, however, as depreciation is calculated into the asset finance arrangement and repossessed assets are typically sold at auction for a quick sale, with efficiency a greater concern than profit.
In all cases, it is advised to keep up repayments on your asset finance and not allow repossession to occur.
The Benefits of Asset Finance
When properly managed, asset finance is a huge benefit to businesses, making it one of the primary funding structures to help companies grow across the UK.
Some of asset finance’s main benefits include:
- Spreading the cost of expensive items to allow businesses to invest in equipment, machinery, vehicles, furniture and fittings, and property without the need for huge capital expenditure.
- Providing access to the newest technologies and latest equipment.
- Releasing equity tied up in physical business assets.
- Offering short-term financing to bridge difficult periods of cash flow.
- Enabling the taking of opportunities.
- Giving businesses greater purchasing power.
- Leaving key capital funds available for investment in other areas of the business.
- Assisting startups with the assets needed to begin their business.
- Delivering funding with lower interest rates.
- Supporting businesses in financial difficulty with poor-credit loans designed to provide an essential boost.
- Allowing companies to present themselves in a professional manner at every stage of the business journey.
Asset Finance with Clifton Private Finance
At Clifton Private Finance we have asset finance experts who can help you with any of your asset finance queries.
Speak to us today and let us show you how the right asset finance can propel your company forward.
