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Welcome to the world of asset finance, where businesses can secure the tools and equipment they need to thrive without putting a strain on their cash flow.
Almost any business, from eager startups to international enterprises, can make use of asset finance, although we do often see growing SMEs more often making use of this important facility to help accelerate their expansion.
In this blog post, we’ll be exploring the key differences between two popular types of asset financing: hard asset finance and soft asset finance. So, whether you’re a seasoned entrepreneur or a startup owner exploring business finance solutions, buckle up as we navigate through the nuances of these two essential concepts.
Asset finance is the process by which a business uses its assets (buildings, equipment, etc.) as security against a loan. These loans are used to either purchase or hire new equipment, allowing a business to access the equipment they require immediately while being able to spread the cost over a set period.
At the end of this period (and depending on the facility they chose), the business can then choose to either purchase the equipment outright, upgrade to a new piece of equipment (and start a new finance facility), or to return the equipment if no longer needed.
For example: a construction company may need a new crane. Rather than buying an (incredibly expensive) crane, they use asset finance to fund the hire of a crane. They then use this for a set period, paying their loan off in affordable monthly payments. At the end of the term, they return the crane as it’s no longer needed.
Asset finance is a smart way for businesses to acquire the necessary equipment, machinery, or technology without the upfront costs that can sometimes cripple cash reserves. It’s like giving your business a financial boost while ensuring you stay competitive and up-to-date.
From here, asset finance is split into two: hard asset finance and soft asset finance.
Hard asset finance is the process of borrowing money to finance heavy machinery, vehicles, or industrial equipment for your business. It caters to tangible assets with a substantial resale value, such as construction equipment, delivery trucks, or manufacturing machinery.
For many businesses, especially SMEs, it’s almost impossible to buy this expensive equipment outright. Asset finance makes it possible for you to access the essential hard assets you need to grow.
The key feature of hard asset finance is that the asset itself often acts as collateral for the loan. This usually results in more favourable terms and interest rates. Businesses can use this type of financing to acquire assets that are crucial to their operations without compromising their working capital.
On the flip side, soft asset finance focuses on intangible assets that may not have a concrete resale value. This can include items like software, IT infrastructure, or even office furniture. Since these assets may not hold their value as well as hard assets, lenders usually view them as riskier; it’s a much rarer form of asset finance.
Soft asset finance, however, provides a way for businesses to spread the cost of acquiring these essential items over time. While interest rates may be slightly higher compared to hard asset finance, it allows companies to maintain financial flexibility without tying up valuable collateral.
Monthly repayment rates will be agreed in advance, and you can properly budget knowing exactly how much your soft assets will cost you every month.
Now, let’s talk about a key consideration in asset finance – residual value.
‘Residual value’ refers to the estimated value of the asset at the end of the finance term. In hard asset finance, the residual value is often higher because tangible assets tend to hold their value better. This can result in lower monthly payments for businesses, as lenders know that the asset can be sold to finish repaying any loans.
By contrast, soft asset finance usually has a lower residual value, as intangible assets can depreciate more rapidly. However, this doesn’t make soft asset finance any less valuable. It’s about finding the right fit for your business needs and financial goals.
When exploring business finance solutions, it’s essential to assess your specific needs, the nature of your assets, and your long-term business strategy.
Hard asset finance is great for businesses heavily reliant on tangible equipment, such as construction companies, while soft asset finance offers flexibility for those investing in intangible assets, such as fintech.
It can be incredibly difficult knowing where to start with asset finance, which is why we recommend talking to asset finance experts before you get going.
Fortunately, you’re in the right place! At Jones & Co, we work with growing businesses just like yours. By learning all about your business, history and goals, we’re able to connect you with a lender that’s a perfect match for your business, ensuring you have the requisite funds to grow.
Click the link below to get in touch with our specialist team today.
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