There are a few different ways you can arrange Asset Finance. Some will be more cost-effective and better suited to you than others. Before making a decision, consider the below:
Understanding Your Asset Finance Options
All types of asset finance involve leasing or hiring an asset from a finance company who purchases the asset on your behalf.
- Payments are for a set contractual period and include hire/repayment costs and interest
- The finance company owns the asset until the end of your contract however, in some circumstances you may have the option to purchase the asset (see below)
- Finance is secured against the asset itself with no other collateral required
- Lenders offer various terms and outcomes – we can help you select the best deal
The main types of asset finance are explained below:
Hire Purchase allows you to pay for an asset in installments, giving you ownership of the equipment at the end of the repayment term.
- The title to the asset will be yours on completion of the plan, although you will be the owner for accounting purposes from the start of the contract
- Capital allowances may be claimed
With a finance lease, you hire an asset from the finance company for a fixed term, at the end of which the lender usually retains ownership of the asset.
Ideal for sectors where technology develops rapidly, and where regular upgrades are required to stay competitive.
- Flexible rental terms for the duration of the asset’s productive working life
- Lower monthly payments than hire purchase – your credit rating is unaffected
- No VAT required upfront but is applied to monthly charges across the term
- You can claim maintenance costs as a trading expense but not capital expenses
Similar to a finance lease, the difference being:
- Agreement covers only part of an asset’s economic life – lease terms are shorter and cheaper than finance leasing or hire purchase
- Some short-term contracts include maintenance and technical support
Payments are calculated by the difference between the original purchase price and projected resale value at the end of the term, so operating leases are most used for high value assets in industries where technological change is modest.
Contract Hire is a specific type of asset finance used for vehicle hire – the most common form of vehicle leasing.
- A vehicle is leased for a fixed period in return for specified monthly payments
- The asset is returned to the lender at the end of the contract
- Businesses have the flexibility to hire the latest commercial vehicles on variable lease terms, with full visibility of monthly costs for budgeting and cash flow
- Businesses can reclaim VAT on all payments made
- Some hire contracts include maintenance and replacement vehicles during downtime
Balloon payments are lump sums made at the beginning or end of a hire/lease agreement. They can form part of any type of finance contract and are used to reduce the value of monthly payments on high-value assets.
Balloon payments are beneficial for companies that have some capital available and want lower repayments for cash flow purposes.
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Some forms of commercial funding and commercial loans are not regulated by the financial conduct authority