What is the difference between asset based lending and asset finance?
By Mark Lester -
While asset finance and asset-based lending sound incredibly similar, they have very distinct roles, applications and advantages for businesses.
Here, we look at the differences between asset finance and asset-based lending which are offered by Arbuthnot Latham’s subsidiaries, Arbuthnot Commercial Asset Based Lending (ACABL) and Renaissance Asset Finance (RAF).
What is asset-based lending?
Asset-based lending releases working capital from your entire balance sheet (accounts receivable, stock, plant & machinery and property), rather than specific individual assets.
It enables businesses to generate the optimal level of working capital for strategic ‘events’, such as acquisitions, management buyouts and buy-ins, refinancing and restructuring.
Cash flow loans may also be available (subject to EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization) to provide even greater headroom.
What is asset finance?
Asset Finance enables you to acquire the use of a business-critical asset, such as machinery, equipment and vehicles, by spreading the cost over its useful operating life.
The two main forms of asset finance are Hire Purchase and Finance Lease.
Hire Purchase is a straightforward method of financing the purchase of an asset without the need for a large capital outlay.
The cost of the asset is spread over the agreed term and paid by fixed monthly instalments that will not increase even if bank interest rates rise, enabling you to budget with certainty.
As its name suggests, with this form of finance you own the asset once you have completed the final payment.
A Finance Lease, on the other hand, is a form of ‘rental agreement’ rather than a ‘purchase agreement’.
Here, the leasing company buys and owns the equipment or vehicle and you simply pay for their use over an agreed period.
With both forms of finance, you obtain immediate use of the equipment, conserving your capital budgets and preserving your existing lines of credit.
Asset Refinance allows you to raise cash from assets you already own. You can take finance secured against the value of the asset which you pay back over an agreed period.
Any asset with a proven second-hand value could be suitable for refinancing. A cash injection can help you invest funds where they are needed to help you build your business further.
A customer will only retain ownership under a sale and hire purchase back arrangement. In a sales and leaseback transaction, they transfer the title to RAF and rent it back.
Finance in action
Although both asset finance and asset based lending unlock the values tied up within existing assets, the best way to illustrate the differences between them is to look at example scenarios.
Arbuthnot Commercial Asset Based Lending – fuelling growth
In this deal, a large precision engineering group sought significant levels of funding both to support the acquisition of a specialist manufacturing business and to provide ongoing working capital to enable further growth.
The £5.23m all-asset funding package, which comprised facilities against debtors, plant & machinery and property together with a CBILS loan, was structured and delivered within an agreed timescale in line with the ambitions of the management team to drive scale and take the business to the next level.
Renaissance Asset Finance – generating cash
A large haulage company needed funds to acquire another business. They had approached their clearing bank and been told ‘we do not offer funding for acquisition’.
A refinance package was structured on £450K of used trucks that they owned, to enable them to buy out the other company and expand their business.
Increasingly businesses are looking to their assets to fund their future.
We hope that this guide will give you food for thought in terms of how you can finance equipment and vehicles as well as unlock the hidden value in your existing business assets to realise your ambitions.
Renaissance Asset Finance provides funding facilities, both direct and through brokers, to Small and Medium-sized Enterprises (SMEs) and HNWIs (High-Net-Worth Individuals) across Great Britain.
Mark Lester is Joint Managing Director at Renaissance Asset Finance, the asset finance subsidiary of Arbuthnot Latham. Mark has held various senior credit roles over the years before he became one of the founders of what is now Renaissance Asset Finance in 2014.