Acquiring equipment, vehicles or other assets comes with the everyday requirements of running a business. But, paying the full amount upfront can be tough on cash flow.
That’s where Asset Finance comes in.
Designed to help preserve cash flow, improve budgeting and enhance tax benefits, “Asset Finance” is a term that summarises a few different types of finance. Here, we breakdown the key functionality of each to help your business decide what may work best for you.
Asset Finance Type 1: Hire Purchase
Hire Purchase or “HP” is a commonly seen type of asset finance. This product allows you to spread the cost of an asset purchase over an agreed period, with regular monthly payments. Once the final payment is made, your business will own the asset.
How It Works
You’ll pay an initial deposit to the lender and then make fixed monthly payments over the agreed term. These payments will cover the asset’s full value, with the lenders interest-rate on top. At the end of the term, you may pay a small final fee called an OTP (Option to Purchase) which then gives your business full rights to the asset.
Is Hire Purchase the Right Type of Asset Finance for You?
Yes, if…
- You wish to obtain ownership of the asset at the end of the term
- You require fixed monthly payments
- You’re looking for a flexible finance plan e.g. term, frequency etc.
- You want to reclaim VAT on the purchase (VAT registered businesses only)
No, if…
- You don’t wish to be responsible for the maintenance of the asset
- You plan to sell the asset during the finance agreement
- You’re not happy to pay more for the privilege of monthly payments over buying outright
Asset Finance Type 2: Finance Lease
Unlike with a Hire Purchase agreement, you won’t own the asset at the end of a Finance Lease agreement. However, it does offer a flexible way for businesses to access equipment or vehicles they need, and you may be able to extend the lease, upgrade or return the asset at the end of the agreement, offering a different wealth of benefits to businesses who may not need to own an asset outright.
How It Works
Once you have agreed the terms with a lender, you’ll make an initial rental payment, followed by regular payments over the lease period. Both the risks and rewards of leasing the asset are transferred to you. This means the asset shows on your balance sheet.
Is a Finance Lease the Right Type of Asset Finance for You?
Yes, if…
- You need long-term access to an asset, without needing to own it
- You wish to deduct the payments as operating expenses for tax benefits
No, if…
- You want to obtain ownership of the lease
- Your requirements for the asset are likely to change throughout the term
- You don’t wish to be responsible for maintenance of the asset
- You wish to sell the asset
Asset Finance Type 3: Operating Lease
Think of an “Operating Lease” like renting – you’ll make regular monthly payments to use the asset over an agreed term. You won’t obtain ownership of it, but you may be able to extend the lease, or upgrade or return the asset at the end of the agreement.
How It Works
You will lease the asset for an agreement period, often much shorter than the assets working life. At the end, you simply return it to the “lessor” – who retains ownership of the assets “risks and rewards” throughout the lease. This means the asset stays off your balance sheet.
Is an Operating Lease the Right Type of Asset Finance for You?
Yes, if…
- You need operating access to an asset, without needing to own it
- You want lower monthly payments and a shorter-term
- You wish to deduct the payments as operating expenses for tax benefits
No, if…
- You need to gain residual value on an asset
- You want to sell an asset
- You don’t want responsibility for maintaining the asset
Choosing the Right Asset Finance Option
Making the decision on which way to go when it comes to Asset Finance can feel overwhelming. In actual fact though, it depends mostly on the goals of your business, and how you to plan to use the asset – which you are likely to already know!
Transition Finance are here to listen to these requirements, and help you match up the best Asset Finance product to suit. We take the time to understand your business in detail and what the future looks like to ensure we match you with a product that will stand the test of time.
Get in touch today on 01908 039 489 or contact us via the website to start a conversation!