Hond Financial

Posts Tagged ‘asset finance’

It may already be obvious that modern society involves careful planning in order for us to survive; gone are the days of barter exchange with the ability to easily and accessibly trade goods. The fact that we have adopted money as the preferred medium of exchange in many ways allows for more enterprise, flexibility and development, but also requires that care be taken when making financial decisions.

There is now a universal need to create assets or to maintain the ones we already possess and, once addressed, this provides a solution as to how to pay for our liabilities and sustain our existence. Many people find that to create a budget helps them to account for their incomes and expenditures.

Should a person’s assets total a greater amount than their liabilities then it is said that they have accumulated wealth. Ideally, it is desirable to stay in this position. While this gives the person the capacity to spend more on consuming goods and services, it is commonly recognized that once something is consumed, it may never be able to be recovered.

Therefore, when wealth is achieved a person has a responsibility to spend that wealth wisely, since it is the continuous flow of value or money that maintains or increases wealth. Changes in an individual’s circumstances may foster a higher level of caution than previously engaged in, such as the purchasing of a life assurance policy.

Despite the most strategic and elaborate of financial plans, the uncertainty that the future holds can often present unexpected contingencies that have the capacity to affect even the most cautious of individuals.

For instance, a person’s assets may be well in excess of their liabilities, but if the value of these assets were to fall then their overall wealth would also decline. This can have significant consequences, dependant upon the gravity of the reduction in the value of assets.

This type of unforeseen circumstance has frequently been experienced when a considerable proportion of assets are of a single type, such as shares in public companies. At the point of a stock market crash, the value of assets can depreciate simultaneously as a consequence of their similarities, and many have subsequently suffered financial loss to the point of unavoidable debt.

It is important to note that, similarly, storing money with any single particular financial institution may also be found to have comparable results at times, especially when that institution is found to be insolvent and subsequently falls into receivership for bankruptcy.

Therefore, in considering the above it can be seen that holding assets entails a certain amount of risk. It is fair to say that the diversifying or spreading of that risk over a variety of different asset types is financially wise and doing so in a manner which provides for the unexpected contingencies that human life frequently creates shows a considered, sensible approach to both your personal wealth and protecting your future.

The word ‘wealth’ was originally derived from the Old English word ‘weal’ which denoted the possession of great qualities. Over time, this led to the term being used to indicate ‘well being’.

In the hubbub of modern life and in a world that is increasingly commercially-driven, the well being of a person is principally dependant upon their resources. Due to the shift away from a reliance upon agriculture, modern Western societies have experienced a shift towards a focus on the financial resources a person may have at their disposal as their predominant valuable resources.

The term ‘asset’ is regularly associated with the serious finance of corporations and major businesses, and for the most part often in an accounting context. However, an asset is simply anything that a person may possess within their control that holds the ability to be readily converted into cash.

Assets appear in numerous forms and can include anything from actual cash to balances in a bank account, possessions, equipment, stocks and bonds, buildings and land and may even extend to ‘intangible assets’. The latter have the ability to be converted into cash, however they are unable to be physically handled since they normally appear in the form of an entitlement or right. Common examples of intangible assets can include patents, copyrights and the goodwill of a business. Many businesses may choose to protect their assets through a business life insurance policy, enabling them to ensure that shares, key people within the company or their employees are protected.

As reluctant as most of us are to undertake a lengthy study of accounting and economic theory, it is interesting to note that all of us engage in some form of accounting analysis each day.

We actively participate in an economy where the payment to others for the privilege of consuming goods and services is prevalent. The capacity to pay for these valuables arises as a result of the assets that are under our own control, or from the assets that are created by receiving payment ourselves.

This ability and purchasing power to afford required items is implicitly reliant upon the flow of money and ‘value’. However, identical to any dam full of water, if it isn’t topped up it will eventually run dry…

Therefore, herein lays an extremely important issue.

The discussion of assets necessarily includes the recognition of what are known as ‘liabilities’ and these include the debts or financial obligations that a person owes to others already, or those that they will owe at a time in the future.

It can be seen that, given that an asset is something that can be converted exclusively into cash, should a person convert all of their assets into cash and subsequently repay their debts, bills or ‘liabilities’ in their entirities, the consequent excess balance would be known as financial equity or ownership.

Of course, should the result be that there are liabilities left outstanding then this would present a person who holds negative equity and, without financial recovery, would be ultimately be unable to repay creditors in the future.

This condition has a number of consequences, the most serious of which may be in the form of bankruptcy, which is a legal and formal declaration that a person’s creditors are unable to be paid. This may often lead to restrictions being imposed on a person that restrain them from the full participation in economic life that other people enjoy. Concessions often need to be considered, such as giving up smoking; worth noting is that non-smokers enjoy much lower premiums on life insurance, whereas a smoker’s life insurance premiums are regularly up to 50-60% more expensive than a non-smoker’s. This clearly demonstrates the need for sound asset management.

An asset is defined as anything that has the ability to be converted into cash, therefore it remains a standard accounting practice in the United Kingdom that accounts receivable are classified as a debit account, consequently placing them on the left side of the ledger representing assets.

It is a common business practice for companies maintaining relationships with both suppliers and customers that a supplier will often require payment before receivables are settled in full. Consequently, this often results in a business finding themselves short on funds, even though they may have experienced record sales periods. For the individuals that make up the workforce of a business, this may have serious implications. It is important to make sure that they have particular security strategies in place, such as a life insurance policy or critical illness cover.

It is possible that particular financiers of assets will lend money against receivable accounts or invoices. This type of financing is attractive considering that the receivables themselves are security for the loan, and that it provides businesses with an opportunity to grow in proportion to their sales performance, by providing finance that correlates to that performance.

The facility of this particular asset finance is remarkably flexible, and up to 90% of the security may be made available, often in a matter of hours, on the condition of the gross invoices owing.

As businesses often allow 30 or 60 days for payment of accounts, this may well secure repeat business and foster brand loyalty, but when cash is scarce and suppliers need to be paid in order to stay in business, a business can be stifled to the point of stagnation which in the commercial world is the precursor to extinction. The proficient resource allocation is crucial to a business’ health, however when resources are expended on debt collection to the detriment of application to income-generating activity, the result is invariably a reduced productivity which may consequently result in a far greater loss than the cost of factoring finance.

For a business with a sound cash flow and management, a relationship with a factoring finance provider may prove to be mutually beneficial in addition to containing benefits that hold value to the cost structure of any business. For example, the funding provided will normally be for longer than the due date of the receivables and, as a result, surplus funds can be utilized responsibly under a period of grace. In addition, a particular amount of credit will be extended based solely on the established performance of the business, subsequently having useful benefits in company expansion and asset acquisiton.

The most blatant attribute that factoring harbours that other financial products cannot provide, is that there is a financial courtesy that is specifically and precisely related to the underlying security, being the receivables. Alternative types of asset finance normally consider many other borrower features, including the age of the business and the fixed security that can be provided. It is important in business today to personally afford yourself more security, such as life assurance and income-based protection, should the worst happen.

Several asset financing alternatives offer a repayment scheme that is better enjoyed by the borrower since they are more able to forecast cash flows and are able to budget for the asset acquisition.

However, as most of these products are tailored to the life of the asset, there is usually an obligation on the part of the borrower to make repayments for an extended period. It often occurs that the borrower is required to assume ownership of an asset, which by the termination of the finance contract is normally expected to have significantly depreciated. Even so, should a refund from the sale proceeds of the asset arise, this remaining amount may be negligible when considering the asset’s secondary market value. In business it is always sensible to ensure that your own financial health is in order and suitable personalized cover such as life insurance or critical illness cover is in place.

A fruitful alternative is that of an operating lease. It is worth noting that particularly useful for the acquisition of assets with either high depreciation or those that harbour a uniquely high risk in ownership, this type of financing allows the lease of an asset over a short period of time, rather than for the life of the asset. This is often the case in terms of acquiring technological assets, as there is always a strong chance that they will require upgrading within the foreseeable future.

Should the borrower have a specific ownership obligation at the conclusion of the finance agreement, and therefore an exposure to the asset’s value at that particular time, in the case of assets that become obsolete quickly, there is a considerable loss that is realized by the business.

By choosing an operating lease, the upgrading of the asset in question is convenient with the term of the lease not being burdensome. The risk of ownership remains with the lessor but this risk will most certainly be reflected in the cost of financing the procedure.

Further components and amendments to the lease are easily added due to the practice being simply to pay a monetary sum for an asset’s use while choosing to negate ownership.

Should it be appropriate at the concluding of the term of lease, the borrower still holds the capacity to negotiate the purchase of the asset. However, an alternative is that the lease may be extended with particular consideration paid to the depreciated value of the assets and, consequently, this will usually be at a lower rate than experienced previously.

Should the asset be used in order to generate income then all lease repayments are eligible for tax deductions within the UK, under the condition that the asset is solely dedicated to business purposes. Since leases and rentals do not appear on a balance sheet, a liability is avoided despite a financier holding the ability to enforce a financial obligation.

Within the United Kingom, asset finance is primarily sought in two distinct areas: lease rental and hire purchase.

This area of finance however, is particularly precise in that the specific needs of the borrower are met in what invariably results in a tailor made finance solution. To achieve this kind of detail, the borrower needs to be acutely aware not only of their business, but also the structure of its cash flow and to also demonstrate some foresight into the future life of the asset that is contemplated. It is also advisable that a general awareness of potential future circumstances can be demonstrated, whether this be an awareness of financial difficulties, such as Individual Voluntary Arrangements or an established life assurance policy

Various solutions are able to be structured in order to suit almost any business. Strict guidelines exist, however, that are adopted by lenders in the assessment both the viability of the agreement and the risk assumed. In light of the high level of write-downs in recent months, it can safely be assumed that even stricter controls are in place by all lenders to ensure a business is provided with the appropriate type of financial arrangement.

However, it is a fact that banks are still required to write profitable business, and as such, the above caution merely acts as an indication that financial institutions are under increasing pressure to verify the quality of their business; in addition, like any business they are also under increasing pressure to effectively compete in the market of asset finance to not only retain, but generate profits of their own. For this reason high quality businesses are of even greater value to financiers.

Aside from the awareness of the period of time that the finance is provided for and, of course, the expected life of the asset in question, in seeking to finance assets the borrower is required to provide for contingencies that may be unexpected and alternatives that could possibly present themselves in the future. Some of these may include the possibility of an early settlement of the loan and the associated cost to the business in doing so. Further, the possibility of renegotiating, extending or refinancing may become desirable and there will necessarily be costs involved in this exercise also. The flexibility of taking advantage of these opportunities ought to be considered before entering into any asset finance agreement.

Specifically due to the fact that there are so many asset finance packages available in the UK, each with their own peculiarities, a business seeking asset finance should take advantage of the many models that are made available by lenders, and diligently consider every alternative financing option available. It is also worthwhile to obtain an opinion from a specific accounting perspective, since financial transactions of this type may have profound implications on a balance sheet. For any further information on how the current health of your finances may affect asset financing, please click here.

Often, as a result of its longevity or risk of replacement, the nature of the asset itself will determine the most suitable method of finance. However, with a highly competitive and specialized market like asset finance, it is advisable to carefully research the entirety of possibilities, comparing the cost of finance amongst a variety of financiers prior to executing a legally binding contractual document. In the event of default from this contract, the creditor is entitled to a lien over the assets of the borrower.

As one of the UK’s most popular kinds of asset finance, leasing an asset allows the business the ability to efficiently budget for the cost of the asset in question by committing themselves to a predetermined set of payments of rental.

In recent times technological assets such as computer and telecommunications systems have been found appropriate to this type of finance, but there is no obligation to strictly apply lease rents to any particular asset type. What is advisable, however, is that an awareness of finance and how possible future events may affect the health of your finance and agreement is demonstrated: this website may be able to provide further information.

The advantages of this type of finance are plentiful. The business is able to claim the rents paid on their taxable income, however a large capital expense is not necessarily needed to be endured since the business relinquishes ownership of the asset. While the advantages of claiming a proportion of the asset’s principal value have now been legislated out of existence by the Finance Act 2006 UK, depending on the type of asset any applicable VAT is able to be claimed by the lessee and this effectively reduces the cost of the rents.

If the business has a sound cash flow, and particularly if the asset itself is to generate additional income, the rents are justified by acquisition of the asset itself.

While a lease rental finance option is available on new and used assets, at commensurate cost, the rents paid each month cover both the purchase price of the asset and also the cost of funding it.

Due to this arrangement and, bearing in mind the asset’s depreciation over time, the lessee will receive an additional advantage at the end of the lease when the proceeds from the asset’s sale will be refunded. Naturally, these kinds of arrangements are engineered to provide a profit to the financier and as such there will ultimately be a cost associated with the process, however this release of equity in the asset may represent timely cash flow to the lessee.

Often this type of financial agreement is provided for periods of between 2 years and 7 years, however at the end of the contract, the lessee will have the option of extending the lease at a mere nominal rent if that is more suitable. This may be convenient for reasons to do with financial reporting, as particularly at financial year end, it may not be desirable to receive a sudden boost to cash reserves. Consequently, the lessor retains ownership of the asset and as such, has collateral for their capital expense. Given this security, when initial negotiations take place, a lessor will normally permit the lessee to suggest the amount of payable rents that is most convenient to their cash flow projections.

This type of asset finance is heavily used with respect to vehicles, but is equally appropriate to other assets such as equipment and machinery. It is important to consider that when there is either no or an illiquid secondary market for the asset, the benefit of receiving a refund on rents paid may be jeopardized. For any further information on how the current health of your finances may affect you application for asset finance, please click here.

For plant equipment and other hard assets, hire purchase generally proves to be the most suitable as the borrower retains ownership of the asset at all times.

While this represents a blatant risk to the lender, it is always reflected in the total cost of finance which is usually the rate of interest on the finance itself. This rate is one of a fixed nature, and the agreed terms of the contract will be applicable to the life of the asset.

A particular caution should be exercised in the consideration of the cost of an early settlement of the loan, however a borrower will always be obligated to make a balloon payment which is a lump sum payable at the termination of the contract in order to bring the net payment in proportion to the resale price of the asset. This balloon payment has the ability to be negotiated at the lender’s discretion, and may allow a significant reduction in repayment amounts over the life of the asset; these repayments may be either in advance or in arrears, subject to negotiation.

Occasionally, the provider of hire purchase finance may require that an initial lump sum deposit be paid at the commencement of the transaction. Often, this is mistakenly viewed as representing the interest part of the transaction with the remaining payments determined by the division of the principle amount, however an inquiry into the cost of an early settlement will show that, dependent upon the kind of asset, the interest may not have been paid in full. Balancing this obligation is the fact that existing credit lines will remain available since the asset appears as a fixed asset on the business’s balance sheet. This has a constructive influence on the balance sheet and will only help to support the viability of the business.

Of course, this has the additional advantage of allowing the business to write down the depreciation of the asset against taxable income each year, along with the interest component of the loan.

In the United Kingdom in hire purchase asset finance, ownership to the asset vests in the borrower, and unlike a lease VAT is not charged on repayments over the life of the asset.

It is frequently stated that hire purchase is the most suitable strategy of asset finance when matched to the foreseeable life of the asset, however it is rarely the cheapest option. Therefore, the borrower must use initiative in considering alternatives and, most importantly, the utility that the asset will provide the business, as the benefits the asset brings to the business may well outweigh the cost. It is also important to consider the effects of personal circumstance and future possible financial events; demonstration of this could include holding a suitable life assurance policy, or dealing with negative financial situations such as gambling debt or credit card debt.