WHAT IS ASSET BASED LENDING (ABL?)
Asset-based finance or lending (ABL) is a general term for any form of finance to acquire, rent, lease or fund an asset. For example a property mortgage is an asset based lending product. Cars or vehicles financed by hire purchase are examples of asset based lending. Factoring or invoice discounting are asset-based lending products too.
The funder has normally has security over the assets and lends money to the borrower (your company) to acquire, rent or use the asset.
There are dozens of providers of asset-based lending products in the United Kingdom and it is important to try and understand what your actual requirements are to raise money for the business.
Normally we would say that asset-based lending is not sufficient on its own to fund a business’ working capital requirements and it is likely that factoring or confidential invoice discounting would be a useful product to couple with asset-based lending.
Please call and talk to us if you have any requirement for a blend of asset-based lending and other financial products or please use our search facility to check the type of finance that you require.
There are many types of asset-based lending here are just a few:
Hire purchase for vehicles, machinery, fixed assets, furniture, computers and hardware. Usually you would put down a deposit and then take out a loan to pay the balance over 12-48 months. The business will own the asset when paid for in full. The lender usually has a fixed charge over the asset until paid for in full or sold with its agreement.
Advantages and Disadvantages of HP
Advantages of HP
- The business will own the assets at the end of the contract hire term.
- It can depreciate the assets against its profits.
- Can be over longer terms than leasing.
- Fixed monthly payments
Disadvantages of HP
- Usually requires a substantial down payment or deposit.
- Ties up working capital
- Usually requires a good credit rating
- May require personal guarantees
Leases can be used as a tax efficient method of acquiring ‘assets’ to use within your business and then these assets are either returned at the end of the lease period, refinanced, or sold to the business via a third-party.
Contract hire is a cost effective form of leasing of assets such as cars, vans, trucks and that is one of the most common in the UK. Over half of all company vehicles are funded in this way for example.
Business contract hire agreements allow a company to take on the management of vehicles /cars for a period of time between 12 months and 48 months and this rental is paid in the form of fixed monthly instalments.
The company taking out this agreement will not own the vehicle, when the term of the contract is over, as the cars are returned to the leasing company. Normally there will be a low monthly cost and because the vehicle is returned to the leasing company this covers the final balance that may be due (often called a balloon).
“Always think carefully about signing up to a loan or product for your company that requires personal guarantees. Remember, if the company fails to pay the instalments, you may be called upon to repay the outstanding amounts plus costs".”
Clearly if the balloon payment is not recovered by the lease provider, collection charges may be added to the outstanding balance. This may be recovered from you PERSONALLY under any indemnity or personal guarantee. Watch out, too, for excess use clauses, such as an agreed number of miles per annum, being exceeded.
Contract hire products can be very tax efficient, (we do not give tax advice!) depending upon the product and their cost can usually be offset against the profits of the company.
Always think carefully about signing up for a lease, loan or contract hire product for your company or business, that requires a personal guarantee (PG) to be signed by you and or fellow directors.
A PG means that if the company fails to repay the instalments, or the total amount due, you may be called upon to repay the oustading amounts plus the funder’s collection costs and fees. This may cause financial hardship for you and other guarantors.
Leasing and Contract hire advantages.
The advantages of contract hire are
- Low initial payments.
- Fixed and therefore known monthly costs.
- Often you can ask the leasing company to provide services such as vehicle service licensing and so forth.
- It frees up capital because you do not buy the vehicle with a large deposit as in hire purchase.
Leasing and Contract hire disadvantages.
- There is no option to buy unlike some other forms of business finance there is no option to buy the vehicle or is it at the end of the lease contract.
- If the vehicle or as it is badly maintained or you exceed the annual mileage allowances, then there may be further costs to pay when the vehicle is handed back.
- You may be required to provide an indemnity LINK or personal guarantee to the CID company, this means that you will adhere to the rules and not issue false invoices for example