Business Finance Series – What is Asset Finance? – Part 6
There are numerous ways that you can fund your business. And in this series of blogs, I’m looking at one of the options, namely Asset Finance.
I started the series by providing a general introduction to asset finance and over the past few weeks I’ve looked at the different types of assets that can be funded and the different types of asset finance options that are available.
In this final blog in the series I’m going to examine ‘sale and leaseback’ as an asset finance option, look at how it works and discuss the ‘pros and cons’ of this as an asset finance option.
Sale and Leaseback
What is it?
Sale and leaseback is a way of releasing capital that is currently tied up in an asset and using the equity that is released from carrying out the ‘sale and leaseback’ to re-invest into the business for whatever purpose it may be needed – working capital, recruit more staff, cover a cash flow issue, pay a tax bill – or whatever the reason may be.
It is designed for businesses that have historically chosen to purchase assets outright. I’ll illustrate how it works using the example of a building contractor who bought two JCB diggers for his business 6 months ago. He bought them for cash using cash flow within the business, which at the time was fine.
However, since buying the JCB’s 6 months ago, our building contractor has been awarded a large contract, which means he needs to take on extra staff, which of course requires extra working capital.
But because he had already used a large amount of his capital buying the two JCB’s, he is now short of the working capital he needs to fulfil the new contract. So, our business owner needs to release the capital he has tied up in his new JCB’s and a sale and leaseback of the plant and equipment is the solution.
He approached an asset finance lender and in effect sold the asset – in this case, the two JCB’s to the lender to release the working capital he needed. He then leased the JCB’s back from the lender by paying a monthly lease payment thereby enabling him to continue the use of the plant and equipment within his business.
Benefits of Sale and Leaseback
- It is an ideal way of releasing funds on unencumbered assets owned within the business
- It can be used on a wide variety of assets
- The funds raised can then be used for any purpose within the business
- You continue to have use of the asset
In summary, as we come to the end of this series on asset finance, the fact is most businesses will at some point need to acquire assets. It might be ‘hard’ assets such as vehicles or plant and equipment or so-called ‘soft’ assets such as computer equipment, furniture or telephone systems.
Regardless, asset finance is an excellent way to acquire the assets you need to help your business to thrive and grow.
It provides you with the certainty of a regular monthly payment, meaning you can plan your cash flow with accuracy, but without the need to tie up a large amount of capital in buying an asset outright.
And of course, this can only be good for the overall working capital position of your business.
If you are looking to purchase an asset for your business, or you would like to release funds into your business by utilising an asset you already own, then why not talk to an expert. Email us at firstname.lastname@example.org or give us a call on 020 8949 2122 and let’s see how we can help.