When commercial organisations, whether sole traders, large corporations or public sector companies wish to invest in tangible assets, they usually need an affordable, secure means of finance.

Asset Finance is the third most common source of finance for businesses, after bank overdrafts and loans. The two main forms of Asset Finance are Hire Purchase and Leasing.

Hire Purchase is a well-established method of financing for companies that wish eventually to take ownership of business assets.

The finance company buys the asset on behalf of the customer, who then pays an initial deposit. The remaining balance, plus interest, is then paid over an agreed period. During this period, ownership rests with the finance company, who is effectively hiring use of the asset to the customer.

Once the final payment is made, ownership transfers to the customer.

Key Features

Spread the cost of acquiring an asset over typically 2 to 7 years by paying only an initial deposit which can typically be as low as 5% of the net asset cost plus all of the VAT.

All of your repayments remain fixed throughout the finance term.

Repayments can be monthly, quarterly, annual or seasonal based upon the specific requirements of the customer.

Ownership of the asset transfers to the customer upon making the final repayment which also includes an option to purchase fee

Key Benefits

Low deposits preserve valuable cash resources.

All of the costs of the finance are known at the outset to assist with budgeting and cashflow.

If utilising a balloon to defer some of the capital to the end of the agreement you will make lower monthly repayments than for a standard HP deal.

Under a commercial agreement, the leasing company (known as the lessor) buys and owns the asset.

The customer (or lessee) then hires use of the asset, paying rentals over a fixed period. At the end of the contract, the customer usually has a choice of extending the lease, buying the asset or simply returning it.

There are two main types of leases, namely Finance Lease and Operating Lease.

Under a finance lease, the finance company owns the asset throughout and the agreement covers a set period – considered to be the full economic life of the asset. Often, there is an option to continue leasing at a reduced, or ‘peppercorn’ rate, at the end of the contracted period.

As you are not the owner of the asset, you cannot sell the asset during the rental period.

The finance company can claim the writing-down allowances and pass this benefit to you in reduced rentals.

Key Features

• Spread the cost of acquiring an asset over typically 2 to 7 years by paying only an initial deposit, which can usually be as low as one or three monthly repayments.
• All of your repayments remain fixed throughout the finance term.
• VAT is charged on each repayment and not all up front at the start of a Hire Purchase agreement.
• Repayments can be monthly, quarterly, annual or seasonal based upon the specific requirements of the customer.
• Ownership of the asset rests with the finance company.
• At the end of the agreement there is normally a secondary rental period or peppercorn rental period where the customer makes secondary annual payments equivalent to a monthly payment. This arrangement can continue for several years until either the asset is sold or is scrapped.
• As the customer doesn’t own the asset they can sell it to a third party on behalf of the finance company, who would normally return between 90-99% of the net sale proceeds to the customer.
• Alternatively some Finance Companies allow title to be passed via the original introducer to the customer at the end of the finance agreement for a nominal payment.
• If a customer terminates a lease early then all of the future repayments are normally payable with the possibility of a discount factor being applied by the lessor.

Key Benefits

• Low deposits preserve valuable cash resources.
• No requirement for all the VAT upfront as it is spread over all of the repayments so cashflow preserved for non-VAT registered businesses.
• All of the costs of the finance are known at the outset to assist with budgeting and cashflow.
• If utilising a balloon to defer some of the capital to the end of the agreement you will make lower monthly repayments than for a standard finance lease deal.

An operating lease runs for less than the full economic life of the asset, and the lessee is not liable for the financing of its full value.

The lessor carries the risk associated with the residual value of the asset at the end of the lease.

This type of lease is often used when the asset is likely to have a resale value, e.g. transportation assets. The customer gets the use of the asset, sometimes along with other services. Operating leases are particularly attractive to companies that frequently update or replace equipment and want to use equipment without ownership.

The most common form of operating lease in motor finance is contract hire, particularly in the provision of vehicle fleets.

Key Features

A rental agreement which be used to acquire the use of an asset over typically 3 to 7 years by paying only an initial deposit which can usually be as low as one or three monthly repayments in advance.

Key Benefits

This finance product is normally utilised when a Customer is sourcing asset(s) from multiple suppliers or via foreign suppliers or if there are stage payments spread over time, which makes it difficult for the supplier(s) to invoice the Finance Company direct. Finance Companies want to pay suppliers in full to obtain title but the supplier’s terms may not be compatible with this or the Customer might want to withhold part of the total invoice price to ensure an asset is fit for purpose after commissioning and therefore builds a retention into the payment terms.

In this instance the Customer effectively buys the assets on behalf of the Finance Company making the payments to the supplier under the terms of the supply agreement. When all payments have been made to the supplier and the Customer takes title to the assets, they would then invoice the Finance Company and incept a new finance agreement, either Hire Purchase or Finance Lease depending on their particular circumstances.

Please also consider that you may prefer to use cash for your purchase.

Refinance is a way for a Customer to boost cashflow by raising funds by releasing the equity in unencumbered assets or assets nearing the end of existing finance arrangements.

The Finance Company will purchase the assets from the Customer at their perceived current value. The Customer enters into a new finance agreement, either Hire Purchase or Finance Lease, depending on their particular circumstances, over a fixed period of time. This results in the Customer maintaining uninterrupted use of the assets for a fixed monthly repayment.