Even though it can work out more expensive in the long run, it eases potential cash flow problems in the short to medium term.
Types of asset finance
There are a number of options to choose from depending on your business’ cash flow.
- operating lease
- finance lease
- contract hire
- hire/lease purchase
- contract purchase.
Which one suits your business?
- You will need to decide if you want to hand your asset back or keep it.
- Find out how much you can afford to spend each month.
- Work out advisor fees, the valuation, the documentation required and the security you will need to provide.
- Get a number of quotes before making a final decision.
- If you need expensive specialised equipment for a short-term contract, you can rent an asset over the time period you need it for.
- It can be arranged ‘off balance sheet’.
- Payments towards the equipment can be offset against taxable profits, and you can reclaim VAT paid on rental machinery.
- The cost of the asset can be linked with the revenue it will generate.
- A financial lease enables you to rent an asset over a long-term, agreed period of time. A typical term is around three years, but it can be longer (long enough for the financial business to recoup their outlay).
- You will need to insure and maintain the asset, even though you will never own it.
- The asset will be sold at the end of the rental period, and your business should receive a good share of the proceeds.
- You will not pay VAT on the buying price, but on the rent payments. These can be offset against your taxable profits.
- The initial costs are low and you will be able to use the machinery straight away.
- This is typically used for vehicles – you can get a vehicle delivered with optional running costs (tax, fuel, MOT etc.) included in the monthly payments.
- At the end of the lease, you will return the vehicle and start again. This enables you to source the latest equipment without any hassle.
- Contract hire removes the risk of asset depreciation.
- If you would like to buy the asset at the end of your agreement, hire purchase could be the option for you.
- You can structure your payments around your cash flow. You can pay a lump sum or reduce your payments depending on your situation.
- Hire/lease purchase combines the option to own the asset and flexible repayment options.
- If you are unsure if you want to purchase the equipment, choosing contract purchase gives you the option to either buy, or refuse to buy, the asset at the end.
- Your payments are reduced because of the agreed upon value of the asset.
- If you would like to keep the asset, you can pay a lump sum at the end. If you don’t, just return it and you won’t have anything else to pay.