For businesses that rely on equipment, technology, and office infrastructure, accessing the right financing solutions can be crucial for growth. Asset finance is a popular option that enables companies to acquire necessary assets without large upfront costs. However, not all assets are the same, and they’re generally divided into two categories: hard assets and soft assets. In this article, we’ll focus on soft asset finance—what it is, how it works, and why it could be a valuable option for your business.
What is Soft Asset Finance?
Soft asset finance is a form of financing used to acquire intangible or rapidly depreciating assets. Unlike hard assets, such as vehicles and heavy machinery, soft assets typically do not hold a high resale value and may have a shorter useful life. Common examples of soft assets include:
- IT equipment and software
- Office furniture (e.g., desks and chairs)
- Telecommunications systems
- Audio-visual equipment
- Electronic point-of-sale (EPOS) systems
Due to their lower residual value and faster depreciation, soft assets are generally viewed as riskier by lenders compared to hard assets. However, soft asset finance offers a way for businesses to spread the cost of these essential items over time, helping preserve working capital and improve cash flow.
Key Features of Soft Asset Finance
Soft asset finance is designed to support businesses in acquiring the assets they need without burdening their cash reserves. Here are some key features that make soft asset finance an attractive option:
- No Large Upfront Payments: Rather than paying for the asset outright, businesses can make monthly payments, which can be crucial for managing cash flow.
- Flexible Repayment Terms: Repayment terms are usually structured to fit the expected useful life of the asset, helping businesses budget effectively.
- Preserves Working Capital: By spreading the cost over a period, businesses can use their cash reserves for other critical needs, such as marketing, staffing, or stock purchases.
- Predictable Monthly Costs: Fixed monthly payments help businesses plan their finances with more certainty, making it easier to manage operational costs.
Types of Soft Asset Finance Options
Businesses looking to finance soft assets typically have two main options: leasing and hire purchase.
1. Leasing
Leasing is a popular option for soft assets, as it allows businesses to use the asset without owning it outright. In a lease agreement, the business pays a monthly fee to use the asset for a set period. Once the term ends, the business can either return the asset, extend the lease, or, in some cases, buy the asset at a reduced price.
- Operational Lease: This type of lease typically lasts for a shorter period, and the asset is returned to the lender at the end of the term. Operational leases are ideal for assets with a short useful life or items that require frequent upgrades, like IT equipment and software.
- Finance Lease: A finance lease is usually longer-term and allows businesses to benefit from the asset over most of its useful life. At the end of the lease, the asset is returned to the lender, but some finance leases also allow businesses to purchase the asset for a nominal fee.
Leasing offers the flexibility to upgrade or replace assets as technology evolves, making it an excellent choice for businesses that need to stay up-to-date without incurring high costs.
2. Hire Purchase
Hire purchase is a financing method that enables businesses to acquire an asset by paying for it in instalments over a period. Unlike leasing, ownership of the asset transfers to the business at the end of the hire purchase term once all payments are made.
- Fixed Repayments: Hire purchase agreements involve fixed monthly payments, which makes budgeting straightforward.
- Ownership at the End of Term: After completing all payments, the business owns the asset, which can be beneficial for items that retain some value, like office furniture.
- Initial Deposit: Hire purchase agreements usually require an initial deposit, with the remainder of the cost spread across the agreed term.
Hire purchase is a good option for businesses that want to eventually own their soft assets outright, rather than constantly upgrading them.
Why is Soft Asset Finance Considered Riskier?
Soft asset finance is typically considered riskier by lenders compared to hard asset finance, primarily due to low residual value. Soft assets depreciate quickly and usually have minimal resale value, which limits the lender’s ability to recoup losses if the borrower defaults on payments.
Residual Value in Soft Asset Finance
Residual value refers to the estimated worth of an asset at the end of the finance term. For hard assets, such as construction machinery or vehicles, residual value is often higher, making it easier for lenders to offer favourable terms. However, for soft assets, the residual value is generally lower due to the rapid depreciation, particularly for items like IT equipment and software. This can result in slightly higher interest rates or stricter repayment terms to mitigate the lender’s risk.
Despite this, soft asset finance remains an essential tool for many businesses, particularly those in sectors where IT systems, software, and other soft assets are crucial for operations but have limited resale value.
Benefits of Soft Asset Finance
Soft asset finance provides several advantages for businesses, especially those that need to acquire intangible or fast-depreciating assets. Here’s a look at some of the main benefits:
- Improves Cash Flow: By avoiding large upfront payments, businesses can retain their cash reserves and improve liquidity.
- Immediate Access to Necessary Assets: Soft asset finance allows businesses to quickly access the tools and infrastructure they need to operate efficiently.
- Tax Efficiency: Depending on the structure of the financing, lease payments can often be offset against corporation tax, which can offer some tax relief for the business.
- Flexibility to Upgrade: Leasing options provide the flexibility to upgrade assets at the end of the term, helping businesses stay competitive in rapidly changing markets like technology and telecommunications.
Common Uses of Soft Asset Finance
Soft asset finance is particularly beneficial for companies in sectors where technology and office equipment are essential but quickly become outdated. Common uses of soft asset finance include:
- IT and Software Upgrades: For businesses in sectors like fintech, education, or marketing, staying updated with the latest technology is crucial. Soft asset finance makes it easier to spread the cost of acquiring IT infrastructure and software.
- Office Furnishings and Fixtures: Startups and growing companies often need to furnish new office spaces. Soft asset finance enables them to obtain desks, chairs, and other office essentials without depleting cash reserves.
- Telecommunications and AV Equipment: Communication technology, such as video conferencing systems and phone lines, is essential for many businesses. Soft asset finance provides a way to access the necessary equipment with manageable monthly payments.
Choosing the Right Financing Option
When considering soft asset finance, it’s essential to assess the specific needs of your business and the nature of the asset. Key factors to consider include:
- Asset Lifespan: If the asset has a short useful life or requires frequent updates, leasing may be more suitable. For assets that will be used long-term, hire purchase could be the better choice.
- Ownership Preferences: If your business wants to own the asset outright, hire purchase is the right option. If you prefer flexibility and the ability to upgrade regularly, a leasing solution might be better.
- Budgeting Needs: With fixed monthly payments, both leasing and hire purchase help make budgeting more predictable, but interest rates and deposit requirements may vary.
Is Soft Asset Finance Right for Your Business?
Soft asset finance can be a valuable option for businesses that need to acquire technology, office equipment, or other intangible assets without impacting cash flow. While it may involve slightly higher interest rates than hard asset finance due to the lower residual value, it provides access to critical assets that can drive growth and operational efficiency. For businesses in technology, creative industries, and corporate services, soft asset finance can support innovation and competitiveness without the financial burden of upfront costs.
If your business relies on equipment that depreciates quickly or has little resale value, soft asset finance is worth considering. By understanding the options available and working with a finance provider, you can secure the assets you need to grow, while keeping your finances healthy.