What is Asset Finance?
A flexible, fast & straightforward way of acquiring the assets your business needs without tying up your own valuable working capital.
Hire Purchase and Leasing are amongst the most widely-used & simplest forms of credit and can be used to finance almost any business asset, whether hard (e.g. plant/machinery/vehicles) or soft (e.g. IT/office equipment/scaffolding/catering equipment), subject to credit underwriting.
Hire Purchase (HP) is a popular option if you want to own the asset at the end of the agreement. The asset is purchased on your behalf and a tailored repayment plan created to suit your budget. At the end of the agreed term, with the final payment & an option fee you can take ownership of the asset.
Benefits of Hire Purchase
- Simple straightforward product: vat is paid in full up front together with a deposit & you arrange your own maintenance, repairs, servicing & insurance
- Tax advantages: you claim back the vat, capital allowances & offset interest payments against profits
- Flexibility: agreement is structured to suit your budget, with potential low or nil deposits, vat deferrals & balloon payments subject to credit underwriting, fixed or variable payments, supplier stage payments
- Ultimate ownership: you own the asset at the end of the agreement
With a Finance Lease the lender buys the asset on your behalf and then leases it to you for a fixed monthly cost. Unlike Hire Purchase there is no deposit or vat to pay up front, but vat is calculated on each monthly rental. Substantially all the benefits of ownership, but the lessor (lender) retains title to the goods. At the end of the lease term (primary period) you can : hand the asset back; sell it to a 3rd party on the lessor’s behalf & receive substantially all of the sale proceeds; continue the lease into a secondary period usually at a peppercorn rental. (Note: you are not able to claim the capital allowances on the goods).
Benefits of a Finance Lease
Free up capital: no deposit payable, vat spread over the agreement term
Tax efficient: lease rentals are allowable as a business expense & vat on each rental is reclaimable
Cost control: easy budgeting for maintaining the equipment, with the option of including maintenance costs in the monthly rental
An operating lease differs from a finance lease in that the lender (lessor) takes a residual interest in the asset, i.e. recovers part of the capital cost from the sale of the asset at the end of the agreed lease term. Monthly lease rentals are consequently lower than on a finance lease. At the end of the primary period you can : hand the asset back; with the lender’s (lessor’s) agreement continue the lease on recalculated rentals based on fair current market value.
Benefits of an Operating Lease
Free up capital: no deposit payable, vat spread over the agreement term, reduced monthly cost because lease rentals not based on full capital cost
Tax efficient: lease rentals are allowable as a business expense & vat on each rental is reclaimable.
Cost Control: easy budgeting for maintaining the equipment, with the option of including maintenance costs in the monthly rental
Off Balance Sheet: under current accounting standards most SME operating leases are off balance-sheet — check with your accountants.