Asset Finance and what you need to know.

Asset finance is an agreement between a financial institution and a company whereby the latter borrows money in order to purchase assets such as vehicles or equipment. It is sometimes also known as capital lease or buy-and-leaseback financing.
This article provides an explanation of asset finance, what types of assets are typically financed (e.g. vehicles, plant and machinery), in what markets they are used (e.g. US, UK) and who usually provides them (financial institutions).

To gain an understanding of asset finance, it is important to appreciate its primary benefits and drawbacks.

First, asset finance can be used to cushion a cash-flow squeeze by allowing a company to get access to spare assets rather than cash. For example, a construction company may need vehicles in order to complete railway infrastructure construction. It may also need vehicles for delivery purposes. By converting the full value of the purchase option into asset finance, the company is able to access additional vehicles when it needs them without having to pay for them upfront. The term “capital lease” can sometimes be used instead of “asset finance”.

Second, asset finance can be used by companies to optimise their capital structure. For example, a company with a strong balance sheet may decide to lease some of its assets in order to minimise taxation which might otherwise be incurred if it sold those assets. In addition, the company is able to secure future employment through continued use of those assets. If the value of the leased asset increases over time but not enough for the business to justify paying for it at that later date, then an additional benefit accrues since depreciation tax relief will continue.

Third, asset financing can be used by businesses that want or need to reduce their capital expenditure and free up cash within their business in order to pursue growth opportunities elsewhere (i.e. cash-flow leverage). For example, a company that wants to expand its business may need additional capital in order to purchase new facilities and equipment for the new location, but it is concerned about paying tax on this cash. Asset finance allows the company to access cash through the use of assets rather than through the payment of a lump sum.

Finally, asset finance can be used by companies to extend or improve existing assets in order to encourage greater customer retention and increase employee productivity. For example, the construction equipment manufacturer Caterpillar offers a leasing scheme called Pay As You Grow, which allows companies to use rental payments as a way of paying for their machinery. Companies have the option to purchase the equipment at the end of their lease arrangements.

Asset finance, also known as “capital lease”, “lease-purchase”, “loan lease” and “rent-to-own” is typically used to finance moveable assets such as plant and machinery. For example, some automobile manufacturers offer a scheme called share less purchase which allows customers to pay for new cars through installments over a period of time without full ownership until the final payment is made at an agreed point in time.

Asset finance arrangements are commonplace in the United States, Canada and other English speaking countries and less common in Europe. In 2000, the European Union introduced new accounting standards which required listed companies to report any assets bought on an asset finance arrangement as an asset on the balance sheet.

Most asset finance is provided by specialized banks and leasing companies such as GE Capital or Santander Consumer USA. In addition, some companies that make or sell equipment offer their own schemes such as Caterpillar’s pay as you grow scheme.

Some asset finance is offered through what are known as “asset-backed securities” (ABSs). For example, the US based company General Electric Capital has issued asset finance ABSs which can be traded in public markets such as the ABX.C benchmark US Dollar index.

As with many financial transactions, accountants and professional advisors are likely to be involved in setting up an asset finance arrangement. In addition, lawyers will be required if any of the assets being financed have a long life or require specific clauses in order to protect both sides of the transaction. The latter can occur if a business or an individual doesn’t want certain assets being used for certain purposes or vice versa.

Under the US Patriot Act and similar legislation in other countries, a cash-poor business may also need to consult an attorney to ensure that it operates within any relevant legal constraints.

Finally, companies which sell products or services through credit applications (i.e. hire purchase) often run their own asset finance schemes in order to complement their core business. For example, the American electronics company Best Buy runs a scheme called “Buy Now” whereby customers can buy some of its electrical equipment through an installment plan over a period of time until they own the equipment outright (and thus are free to buy and sell without restriction).

The use of asset finance schemes is not only limited to companies. For example, the UK based company Leeds United FC has a scheme called “Leeds United Lease” which allows fans to pay for season tickets in installments rather than having to take out a loan.

For individuals wishing to build up equity in order to buy a home in the next few years, typical methods include saving and investing as well as asset finance. The latter can be useful if an individual doesn’t have enough money saved up but wishes to own their own home anyway. In this case, it may make sense for individuals to leverage off their assets by taking out loans against them (e.g. taking out a loan to purchase a car) or financing them through an asset finance arrangement (e.g. leasing a car) in order to make it easier for them to get the funds required for their home without jeopardising their long term security.

Asset finance can be confusing and different types can be combined together in order to make up particular packages that suit specific circumstances. For example, an individual may be able to lease a car and take out an additional loan against it in order to pay off their existing debts more quickly while also being able to build up equity in the vehicle itself so that they have something of value once they decide to sell it. This is sometimes known as “cash-flow leverage”.

Many asset finance companies offer their own schemes including such phrases as “pay as you grow” (i.e. scheme whereby an individual takes out a loan against the money they save to buy a home) or “pay now” (i.e. scheme whereby individuals can benefit from building equity in order to use it towards buying a home). For example, the Australian based company Cash Converters Australia offers its own pay as you grow scheme called “Buy Now Pay Later”. Pay As You Grow is offered by several other companies including GE Capital Australia, ING Direct and Loyalty Leasing Australia.