What is construction asset finance?
The resources needed for any construction project are likely to be considerable. They include the assets to which any construction company needs access – assets such as equipment, plant, light and heavy earthmoving machinery, trucks, excavators, cranes, crushers, loaders. The list may seem endless.
Construction asset finance provides the access your business needs to these assets. Whether you are involved in public works, private development or a self-funded building project, let’s see how construction asset finance might work.
Access to the assets you need
In many cases, your access to and the right to exclusive use of the assets in question is just as important – if not more so – than outright purchase.
Therefore, we are helping clients make increasing use across the construction industry of lease agreements and hire purchase for access to the plant, machinery and equipment needed for any project.
By way of illustration, the Finance & Leasing Association (FLA) reported a 29% increase in new business in December 2018, compared to the previous year for construction asset finance such as plant and machinery by way of leases and hire purchase agreements:
Conventionally, leases have been divided into two sorts – operating leases and finance leases:
- an operating lease is probably the more standard form of lease in that you buy the right to exclusive use of the assets for the duration of the lease agreement – for as long as your construction project lasts, perhaps – and return the plant, machinery or equipment to the lessee at the end of the lease;
- a finance lease also gives you the right to exclusive use of the plant, machinery or equipment but, at the end of the lease agreement, you may also be given the option to buy the assets concerned.
Recent changes to standard accounting practices have somewhat blurred the distinction between operating and finance leases, with both now treated simply as lease agreements – international accounting consultants Deloitte, for example, explain that with effect from the 1st of January 2019, all leases are to be shown as balance sheet liabilities, expressed as the current value of all future lease payments.
Probably the most traditional form of construction asset finance is hire purchase (HP) – a combination, just as the term suggests, of both leasing or hire and eventual purchase.
How does construction HP finance work?
- typically, a deposit of around 10% of the purchase price of the asset is paid and followed by equal monthly instalments throughout the hire purchase agreement;
- on payment of the final instalment – but not before – ownership of the asset formally transfers to the customer;
- hire purchase agreements are available for all manner of construction equipment, plant and machinery, while applications and approvals are typically swift – subject, of course, to the relevant creditworthiness checks.
For some items of construction plant, machinery and equipment you may have a desire for outright purchase and ownership from the word go.
In that case, the appropriate construction asset finance may be by way of a straight forward business loan.
Some loans are secured against the assets themselves, for instance, while some borrowing can be unsecured – please ask us about the size of the loan you have in mind and the repayment period you envisage.
Business loans may be available from banks and other traditional institutions. Increasingly these days, however, alternative finance providers are in the business of arranging mostly unsecured loans repayable over the short-term in a bid to make construction financing easy to access and flexible, so that it meets a business owner’s needs.