Asset Finance: Common Terms & Definitions
Asset-based lending is a term used to describe business finance which is secured by the company’s assets. The security assets can include items such as equipment, machinery, or even future income.
A balloon payment is the repayment of any outstanding capital at the end of a finance agreement and, if paid, will usually give you uninterrupted ownership of he item.
A capital allowance is money that can be deducted from profits for the calculation of corporation tax. Certain expenses and depreciation can be deducted to reduce the tax company’s corporation tax liability.
Credit committee is an internal division of asset finance providers which is tasked with making the final decision on whether an application will be accepted. Once due diligence has been initially undertaken and all information gathered by the lender, their credit committee will usually assess the full application and make their decision.
A debenture is a legal document which is designed to formally register the lender’s security over the assets of the borrowing company.
Depreciation is the reduction in value of an item over the course of its life. An example of a depreciating asset is a car, which will reduce in value over time due to age, wear and tear.
Due diligence is the term used to describe the lender’s thorough checks into your application. Due diligence is undertaken to give them a comprehensive understanding of your business and the asset they are considering funding.
EBITDA stands for earnings before interest, tax, depreciation and amortization and is a measure of a company’s true operating performance. EBITDA gives the lender a true picture of the underlying profitability of a company and its ability to maintain the proposed monthly payment.
A written contract which allows one party to use an asset for a set period of time, in return for a set payment.
The party which is leasing an item. In a rented residential property, the lessee would be the tenant.
The party which is granting use of an item. In a rented residential property, the leaser would be the landlord.
Sale and HP (Hire Purchase) Back
Sale and HP back allows you to sell an item that you already own to a lender, only to rent it back for on a hire purchase basis.
Sale and Lease Back
Sale and lease back is similar to the above but allows you to sell an item to an asset finance provider and then lease it back. Sale and lease back allows you to raise a lump sum of capital into your business in return for fixed monthly payments.
The set period of time that the agreement is set up for.
Working capital is the money used for the day to day trade of a business.