Asset finance is a type of finance used by businesses to obtain the equipment they need to grow. It usually involves paying a regular charge for use of the asset over an agreed period of time, thus avoiding the full cost of buying outright. The most common types of asset finance are leasing and hire purchase.
Leasing gives the customer access to new equipment by way of renting it for a contracted period, without owning the asset.
How it works - The leasing company (lessor) buys and owns the equipment on behalf of the customer (lessee). The customer pays a rental for the use of the equipment over a predetermined period.
There are two main types of lease:
Under a finance lease, the value of the asset appears on the lessee’s balance sheet and the rental payments pass through the profit and loss account. The full value of the equipment is repaid to the lessor, plus interest, over the lease period.
An operating lease may be more appropriate if the customer does not need the equipment for its entire working life. Payments (which appear in the customer’s profit and loss account) are made to the lessor for the use of the equipment while it is needed. The leasing company may retain responsibility for maintenance and is likely to take the equipment back at the end of the lease period. As the customer only keeps the asset for a very limited period, it is not shown on the lessee’s balance sheet.
Hire Purchase (HP) allows the customer to buy the equipment on credit.
How it works - The finance company purchases the asset on behalf of the customer. The finance company owns the asset until the final instalment is paid, at which point the customer is given the option to buy it for a nominal sum.
Asset finance can be used to fund any asset – ranging from telephones and photocopiers to forklift trucks and aircraft. It could be the perfect solution if your business needs new equipment that might otherwise be unaffordable.
The various forms of asset finance provide a number of advantages for the customer:
They give businesses access to the equipment they need without incurring the cash flow disadvantage of an outright purchase
Finance agreements can often be tailored to the business’ needs, with flexibility on both the term and repayment schedule
Leasing and HP are excellent budgeting tools as payments are usually fixed, allowing improved cash flow management
Asset finance providers often specialise in a particular type of asset about which they have expert knowledge
Although the list of assets that can be finance directly is extensive, there are a number of common categories:
Cars: by far the most common form of asset finance
Other vehicles: trucks, buses and other road vehicles
Agriculture machinery: tractors, farming equipment etc
Plant and equipment: machinery, pallet racking, refurbishments and office equipment
Technology: traditional hardware as well as softwares
Medical: CT Scanners, MRIs, ultrasound equipment, X-ray equipment, Nuclear medicine PET etc
Aircrafts: Airbus, Boeing, Bombardier and others
Energy efficient: renewable energy assets
All too complicated?
Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.
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