Asset finance is a form of financing that is applied toward the purchase of tangible and movable assets. The purpose of this type of financing is to facilitate the purchase of capital equipment required for the day to day running of businesses, and on a larger scale, asset financing can also cover larger assets such as aircraft and vessels.
The key components of the asset finance are that the asset being financed is the primary security provided to the lender and the revenue generated from the asset is used to repay the debt and service interest payments. Depending on the structure of the asset financing agreement, the borrowing entity may also be afforded additional flexibility such as having the option to replace or update the equipment at the end of the lease period.
(a) Plant and Equipment
This category covers a broad range of assets, including industrial equipment such as machinery, generators, cranes and storage units purchased by the borrowing entity.
This category covers a range of vehicles which are used in the course of the borrowing entity’s business, and apart from the normal fleet of cars, trucks and other forms of conventional transportation, can also include tractors, bulldozers, excavators and cranes.
This category deals with vessels that are registered with IMO.
Term Loan:The most common form of financing used is to provide a term loan to the borrower to purchase the asset. The asset that is being financed will be pledged or mortgaged to the lending bank and the receivables used to repay the outstanding debt.
Lease Finance: Here the asset remains in the name of the bank and leased to the lessee. At the end of the finance period the asset is transferred to the lessee.
Shari’a Compliant Structures: Shari’a compliant financing alternatives are also available as solutions to their conventional counterparts. A direct financing may be granted by way of Murabaha, where the bank purchases the asset directly from a third party and immediately resells the same asset to the borrowing entity at a profit. Alternatively, the bank can purchase the asset and subsequently lease the asset to its client pursuant to an Ijarah structure. Ownership of the leased asset is then transferred to the client upon the termination of the lease.