When businesses seek funding through asset finance, the nature of the assets involved can impact the terms, interest rates, and financing products available. In the UK, assets fall into two broad categories: hard assets and soft assets. Understanding the difference between them is essential for businesses looking to secure financing that aligns with their needs and minimizes risk.
What Are Hard Assets?
Hard assets refer to tangible, physical items that generally have a stable resale value and a longer lifespan. These assets are often durable goods or equipment that can retain value even after extensive use. Examples include:
- Vehicles: Light & Heavy Commercial vehicles, company cars, and passenger vehicles
- Machinery and Equipment: Manufacturing equipment, agricultural machinery, and construction tools.
These assets are typically seen as more secure for lenders because they have an established secondary market. In cases of default, the lender can repossess and sell the asset to recoup losses, lowering the risk involved in lending. Therefore, hard assets generally attract lower interest rates and more favorable financing terms than soft assets.
What Are Soft Assets?
Soft assets, on the other hand, include items that may depreciate faster, lack a resale market, or offer limited collateral value. These assets are often intangible or have a less consistent long-term value, such as:
- Technology and Software: Computers, phone systems and IT infrastructure.
- Office Furniture and Fixtures: Desks, chairs, and other furnishings.
- Medical, Gym, Garage Equipment: Specialist and industry specific equipment
These assets are generally seen as higher risk from a lender’s perspective because they have limited resale value. For instance, a lender may struggle to find a buyer for a used IT equipment or office furniture. Consequently, soft assets often attract higher interest rates and may require different financing structures than hard assets to offset the increased risk.
Why Separate Hard and Soft Assets?
The distinction between hard and soft assets is critical because it directly influences lending risk, interest rates, and financing structures. Here’s how each category affects these aspects:
- Interest Rates: Since hard assets retain their value better, they are generally seen as less risky, leading to lower interest rates. Soft assets, which depreciate quickly and have limited resale value, often come with higher interest rates to compensate for the increased risk.
- Risk to Lenders: Hard assets provide more security to lenders. In the event of a borrower default, a lender can repossess and sell a hard asset, recovering a significant portion of the loan value. With soft assets, repossession and resale may not be as viable, leading to greater exposure to loss. This factor makes lenders more cautious about financing soft assets.
- Choice of Finance Product: The asset type influences the finance product a business might choose. For hard assets, options like hire purchase or lease financing are common, as these structures allow businesses to spread payments over time while eventually gaining ownership or returning the asset to the lender. For soft assets, businesses might prefer operating leases or short-term financing, where they can use the asset for a set period without full ownership, minimizing risk associated with rapid depreciation.
Choosing the Right Finance Solution Based on Asset Type
- Hard Assets: Typically best suited to long-term financing products, hard assets are often financed through hire purchase agreements or lease purchase options, where the business has the option to purchase the asset at the end of the term.
- Soft Assets: Due to their rapid depreciation, soft assets might benefit from short-term financing options like operating leases or finance leases. These options allow businesses to use assets without long-term commitments, adjusting as technology or needs change.
Final Thoughts
Understanding the difference between hard and soft assets is fundamental for businesses in the UK seeking asset finance. By knowing how each category affects interest rates, lender risk, and product choice, businesses can select financing solutions that best align with their assets and financial goals.
For more information and to discuss your asset finance needs please call MacManus Asset Finance on 01443 800621 or email info@macmanus.finance.
