As you develop your business you will, at some point, probably need to acquire some equipment, machinery or vehicles to help you meet your operational commitments. These can include big ticket items and buying these assets will take careful planning. Rather than tying up large amounts of your working cash in the purchase you could explore spreading the cost.
There are a couple of ways in which you can spread the cost of buying assets – leasing and hire purchase, collectively known as asset finance. Leasing and hire are popular forms of asset finance that allow you to purchase sizeable assets without paying for them up front.
You can pay for assets over time and use them for an agreed period while you are repaying the finance without having an up-front impact on your cashflow.
- What can I buy using asset finance?
- Hire purchase
- Leasing
- The advantages of asset finance
- The disadvantages of asset finance
What can I buy using asset finance?
You can acquire almost anything you need to run your business using types of asset finance such as hire purchase or lease finance. Although not an exhaustive list, these assets could include:
- Audio visual equipment
- Cooking and catering equipment
- Epos and cash handling
- Furniture, fixtures and fittings
- Gym equipment
- IT equipment
- Security systems
- Telecoms systems
- Vehicles
- Manufacturing machinery
Hire purchase
Once you have identified what you need for your business, you can contract a finance company to buy it on your behalf. You repay the purchase amount to the finance company in manageable instalments over an agreed period of time.
Hire purchase usually involves you paying a deposit and fixed payments over an agreed period. There may be a small fee at the end of the period which secures the title of the asset – in other words you will own the assets once all the payments are complete.
Leasing
Leasing allows you to use the asset in return for rental payments over a pre-determined period. Leasing means you rent the asset and at the end of the agreed rental period you either continue to make rental payments, return or replace the asset – but you don’t own it, ownership reverts to the finance company.
Although a finance lease will look and feel the same as a hire purchase, you will not end up owning the asset at the end of the contract. Ownership remains with the finance company at all times. At the end of the period you are usually offered a new term at a nominal fee.
Leasing can be arranged from terms as short as 6 months up to 5 years and more. Most asset types can be leased from plant and machinery and vehicles, to IT equipment, including computers, servers, printers, telecoms and even some software.
Lease and HP considerations
Most Hire Purchase and Leasing companies will want to make certain that they are taking as little risk as possible with the finance and that your business is well funded, profitable and with a positive balance sheet. At least one of the directors must own a property in the UK and they will want to be able to see that the company can afford the monthly payments. Personal guarantees from the directors are usually required.
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It is possible to obtain leasing and HP for start–up organisations but personal guarantees will always be asked. Some companies will also provide funds for clients with CCJs, losses and negative balance sheets, but the rates of interest will be considerably higher.
You can apply for asset finance through a broker, the finance provider, the equipment provider or manufacturer.
The advantages of asset finance
- High approval rates – you are more likely to be able to get this type of finance than other kinds.
- Quick turnaround
- Limited restrictions
- Advice
- Availability of assets
- Flexibility
- Capital allowances may be available as a deduction against your tax bill. If your business is VAT registered, you can claim back the VAT on the asset up front. Any interest that you pay can also be offset against profits
- Leasing allows you to upgrade equipment at the end of your lease agreement because you are not tied to ownership
The disadvantages of asset finance
- Providers of finance will check your credit records and searches may affect your credit history
- Charges and fees apply if you want to secure the asset at the end of the agreement period
- If you default on repayments the assets may be recovered and your credit history will be adversely affected
- There is a risk you could lose assets that are important to your business
- The value of the assets against which the loan is secured could fall over time and therefore not full cover the balance of loan repayments
- Agreements can be more complex to manage than if you had purchased the asset outright and add to your administration