The dos and don’ts of asset financing

With an economic recovery finally on the horizon, but bank lending still subdued, Catherine Dawson at Maxxia explores the dos and don’ts for businesses looking to take advantage of asset financing as an alternative.

After a prolonged period of stagnation things are finally looking up for the British economy. Green shoots are beginning to spring across the statistical landscape. The OECD has nearly doubled the UK’s 2013 growth forecast to 1.5%. However, bank lending to businesses remains low, and fell in 2012 – so what’s fuelling growth in the UK? The answer is that there are many attractive alternatives to bank lending out there, one being asset financing, which by contrast grew by 5 % during 2012.

Asset financing covers a variety of lending and payments solutions commonly tied to physical assets (this could be anything from trucks to plant machinery to computers) and typically involving lease or lease-like structures. It can mean hire purchase arrangements, operating or finance leases, or even sale-and-lease back arrangements (a convenient method of quickly raising cash). The statistics show that asset financing is an increasingly attractive alternative for growing businesses that aren’t able to access conventional support.

However, there are two major principles businesses should bear in mind when engaging with asset financing: read the small print, and remember that the job isn’t done just because the deal has been signed.

Read the small print

A lot of potential problems can be avoided through a number of steps that should be taken prior to any agreement. For starters, it is crucial that businesses know what they are getting themselves into, paying attention to the fine details of any contract. Insisting on transparency from the very start, and paying close attention to the provisions set out in the initial agreement, is key. A lot of the problems that arise from asset financing have to do with mismatched expectations. Businesses should be clear on all terms and costs at the start of the process. If they aren’t, they should run a mile.

There are various traps companies fall into when it comes to failing to read the small print. It is always important to look beyond headline rates as these can mask hidden costs. To take a specific example with regard to lease arrangements where assets will need to be returned, it is important to ensure that all costs related to returning the equipment are fully detailed in the original offering. In many cases there will be a final payment, or penalties for late delivery of the assets. Businesses should always ensure these are taken account of. They should also check whether transportation costs are included, and what the costs of extension rental will be. On the leasing example, it is worth bearing in mind that some less-than-reputable companies have a history of inflating residual value to reduce the monthly charge – and then imposing conditions that make it extremely difficult for the equipment to be returned at the end of the contract, meaning that the client continues paying for a longer period than intended.

It is equally important to pay due attention to issues that will arise towards or at the end of contract. To take again the example of a lease where assets are to be returned – does the solution include logistics services for returns (such as transportation, or in the case of computers etc. packaging)? If not, it will be important to determine what precisely needs to be returned and in what condition. Other important items to check in this case would be whether there is any flexibility with regard to the returns window and how much notice your company will be given when the lease is coming to an end.

Asset financing isn’t just for Christmas

Small print aside, the other universal principle behind asset financing is to have a plan in place for managing assets and costs throughout the life of the arrangement. It is quite common for the individual responsible for signing an agreement to have left the company before the arrangement comes to an end. Keeping track of assets and liabilities is essential to avoid incurring additional costs, and will likely require the use of a comprehensive and up-to-date asset management tool. This enables users to capture and track relevant data relating to each and every asset – whether this be location, age, condition, etc. – and makes it instantly available to those that need to know.

Businesses that follow these steps will stand to benefit from asset financing. A good thing, given that in the current economic environment it is often the best means to help businesses survive, invest, and grow.

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