Business First Finance

Business & Trade Finance

Business & Trade Finance

Asset finance including vehicles

Asset Finance is a form of finance that allows you use of an asset without having to pay the full price of that asset 'up front'.

Ownership of the asset remains with the lessor (the finance company) who grants 'right of use' for a specified period in return for regular leasing payments. All forms of leasing are in essence rental agreements with the finance company.

The two main types of leasing are:

  1. Direct lease - the leasing company buys an asset (new or used) determined by you and allows you to 'rent' the asset from the lessor.
  2. Sale and leaseback - Allows you to sell an asset that you already possess, whilst still having access to use the asset.

Some leasing companies offer you an end-of-lease option allowing you to either renew the lease or act as an agent for the lessor when selling the asset to a third party.

Who is it for?

Asset Finance is suitable for all kinds of businesses from sole-traders to public limited companies and our providers are able to provide finance solutions, valued from a few thousand pounds, to millions.

  • Improved cash flow - allows you to spread your costs over a longer time than outright purchase with instant access to the asset, minimising strain on your working capital.
  • No risk of capital loss - zero risk of not being able to resell the asset at the end of its life.
  • No debt - a leasing agreement is legally classified as an expense.
  • Cost & cash flow management - as leasing payments are set at a predetermined rate, they are easy to predict and budget.
  • Financial leverage - instead of using cash on asset purchases you will have capital available to the business.
  • Tax advantages - Lease payments are made with pre-tax money allowing you to make significant tax saves
  • No risk - the lessor carries most of the risk associated with owning the asset.
  • Additional advantages - some leasing companies offer maintenance and asset management service as part of the offer.

Different types of Asset Finance

  • Contract hire - typically used for a car or other form of vehicle. This type of agreement requires that you are liable to pay for eventual maintenance and repair of the asset.
  • Finance leasing - You acquire all financial benefits and risks without the legal title. At the end of the lease you may have the option to receive a share of the sale proceeds but you will not become the legal owner of the asset. If you still need to make use of the asset after the period you will need to sign a renewal option.
  • Operating lease - Like the above you will not become the owner of the asset when the leasing period expires, nor will you receive a share of the second hand sales proceeds. You will usually be offered a second lease period for a preferential rate (sometimes referred to as 'peppercorn rental').
  • Hire purchase - After purchase, the legal title of the asset will pass to your business.

Business loans and overdrafts

Business loan works just like a normal loan except that is only offered to businesses that have been trading for a few years and have good credit history.

A business loan is one of the most effective ways of financing business objectives, such as a new venture, additional capital expenditure or even consolidating existing debts.

The types of business loan available include:

  • Secured
  • Unsecured
  • Fixed
  • Variable

Lessons learnt from the 'boom and bust' of the late 1980's has had lasting effect on the appetite of most high street banks for lending both secure and unsecured loans.

In addition, capital adequacy rules contained within the 'Basel II banking accord' and the recent "credit crunch" have forced many lenders to thoroughly review the security of each loan on their books. As a result, many companies that are too young (under one year old), are not currently profitable or are looking for larger unsecured sums tend to be turned down by the traditional banks.

Types of Business Loan

  • Invoice Finance
    • Factoring / Invoice Discounting offer suitable businesses the opportunity to draw advances against unpaid invoices.
    • Invoices are often the largest assets of companies with less than 5m turnover.
    • Can release significant volumes of cash on the balance sheet
    • Preferred by lenders as each invoice is actually "sold" to the lender, constituting a 'secured' loan.
  • Balance Sheet Funding
    • Known as asset based lending or ABL.
    • The lender reviews all assets on the balance sheet and take an individual view on each one, with individual rates and loan-to-value ratios.
    • Cash is then pooled together and offered as a facility to be drawn against.
    • Key to most balance sheet funding is the inclusion of invoice finance.
  • Asset Finance
    • If capital expenditure is the key driver behind the cash requirement, asset financing can be the best way to acquire the asset.
    • Asset Financing often includes options to either buy, or rent the asset.
    • For certain assets such as bespoke machinery or company cars contract hire options may also provide ongoing maintenance and repair.
  • Trade Finance
    • A flexible form of financing ideal when there is an initial outlay required to purchase goods, knowing that it may be some time before they can be resold and a profit realised.
    • Appropriate for companies importing raw goods to be processed or purchasing wholesale with the intention to resell the goods for a mark up.
  • Personal Loans
    • Ideal when the only route to generate the cash to start up a business is for the founder to personally borrow money which they then use to invest in the new business.
    • Possible with an equity release loan on your house or a personal unsecured loan.
Who is it for?

As loans come in many shapes, sizes and options, they can be used for many reasons however the most common uses of a business loan are:

  • Investment in the business e.g. a new marketing initiative
  • Capital expenditure on required assets e.g. IT equipment
  • Consolidation of other commercial debt e.g. VAT or PAYE arrears
  • Purchasing stock