Asset finance: the basics

Asset finance allows for a flexible alternative to traditional bank loans. It enables your business to purchase vehicles like cars and vans for a low upfront fee, and puts specialist equipment and other high-cost fixed assets within easy reach. It can work out to be more expensive in the long run, but eases cash flow concerns in the short to medium term.

Types of asset finance

You can choose from a range of different finance options and tailor your choice to suit your business's cash flow. The following asset finance options are explained below:

• Contract hire
• Hire purchase
• Contract purchase
• Finance lease
• Operating lease

How to choose?

• Decide whether you want to keep your asset or to hand it back
• Work out how much you can afford to pay each month
• While important, cost is not the only consideration to take into account: you need to weigh up valuation and advisors fees, the kind of security you need to provide, and the documentation required, too.
• Don't go for the first lease you are quoted for: compare offerings to find the best deal

Contract hire

• This is an all inclusive way of sourcing an asset - such as a car or a van -- and financing its purchase. It is taken off your hands when the lease expires.
• Contract hire is most commonly used for vehicles where you can get a new car delivered to you with optional running costs (fuel, MOT, tax etc) included in a monthly payment.
• At the end of the agreement you return it and start again so you always have the latest equipment without the hassle.
• Contract hire takes away the risk of an asset depreciating

Hire/lease purchase

• If you ultimately want to own your asset, hire purchase lets you make regular payments and keep the asset at the end of the agreement.
• Payments can be structured around your cash flow. You can reduce your payments and pay a lump sum or 'balloon payment' at the end, reflecting the agreed value of the asset, for instance.
• Hire/lease purchase combines flexible repayment options with the option to own the asset upon the end of the agreement

Contract purchase

• If you can't decide now if you want to own your asset at the end, contract purchase gives you all the benefits of hire purchase, but with the option to say no to ownership in the end.
• A guaranteed value for the asset at the end of the agreement means your regular payments are reduced.
• If you decide to keep the asset, you pay a lump sum. If you don't want it anymore, simply return it with nothing more to pay.
• With contract purchase, you are free to keep or return the asset, and you can secure a guaranteed resale value

Finance lease

• This enables you to rent an asset long-term, over an agreed period. The time-frame is usually around three years, but it is sometimes longer: long enough to allow the finance company recovers their outlay to buy it.
• You never own the asset, but you must maintain and insure it.
• At  the end of the rental period, the asset is sold and your business should receive the lion's share of the proceeds
• There are tax benefits to finance leases: you do not pay VAT on the purchase price, but on the rental payments. These rental payments can then be offset against your taxable profits
• With a finance lease, upfront costs are low, and you can use the machinery immediately

Operating lease

• If you need high value, specialised equipment short-term, or you want assets to support a specific contract, you can rent the asset over the period you need it.
• An operating lease can be arranged 'off balance sheet'
• You can reclaim VAT paid on rental machinery, and payments can be offset against your taxable profits
• With an operating lease, the cost of the asset can be linked directly to the revenue it generates.

Resources

• Businss Link guide to types of leasing
• Busiess Link pros and cons to leasing equipment

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