Asset Finance

Jump to : Pre-Inception Credit | Hire Purchase | Lease Purchase | Contract Purchase

Types of Asset Finance

Asset finance enables companies to obtain funding for the purchase of assets they need to run & grow their businesses successfully. Asset Finance is credit or a leasing facility which is provided in order to help people acquire business assets. Extending loans in order to make purchases is the most common kind of asset financing. Buying equipment and machinery for your business can be a significant drain on your working capital should you pay for them outright with a lump sum payment. The way to spread the cost of such vital equipment is to opt for asset finance, this way regular payments are made over an agreed period of time. Assets Finance is easier to obtain for things that can be quickly resold if need be. Security of a specified asset is spread over the useful life of the asset.

The Benefits Of Asset Finance

• The cost of the asset can be financed from the income stream it generates.
• Asset finance does not tie up working capital or stock funding
• It is a relatively straightforward facility to arrange.
• The rental profile is agreed at inception allowing simple cashflow management.
• Unlike an overdraft, asset finance is generally non-cancellable providing the agreement is maintained correctly.
• Asset finance rates can be as competitive or even better than bank funding rates
• You benefit from the full use of the asset without having to pay all upfront
• Fixed rates are available - making budgeting easier
• Leasing can involve low initial outlay

Pre Inception Credit

Before any asset finance agreement can begin, the finance company has to be in a position to take good and clear title to the assets in question. Finance companies generally insist that the assets are situated at the desired premises and are ready for use. Should a supplier require staged payments on an asset, or if there is a long lead-time to commissioning of the asset, then there will be a period of time when money has to be spent but no finance agreement is in force.

It is possible in these cases to arrange a Pre-Inception Credit facility. This is basically a short-term overdraft from the finance company. You will have to pay interest on any money that is advanced, once the asset is fully commissioned and the finance company can take, the HP or Lease agreement will begin

Asset Finance - there are basically two options - hire purchase & leasing

Hire Purchase

This is the most common and readily available credit facility. Hire purchase enables you to eventually secure ownership of the new assets
In basic terms, you would be required to source the asset and supplier, you would need to negotiate the purchase price with the supplier. You would then need to pay a deposit to the finance company, (usually 10-20%), and the finance company would then then take title direct from the supplier. The cost of an asset can be spread over its useful working life and paid for monthly or quarterly, out of the revenue it earns.

Even though you are technically not the owner of the asset during the agreement, subject to eligibility you can still claim the depreciation allowances as though you had made the purchase outright.

There is usually arrangement and administration fees involved when implementing asset finance, any VAT will have to be paid by you, but subject to eligibility you could recover the VAT. The outstanding amount and interest is then repaid in pre-agreed instalments over the period of the agreement.

At the end of the agreement you obtain title, althrough some company's charge a token fee to transfer the title of the asset over to you. This 'token fee' can vary greatly from company to company. Hire Purchase agreements can be based on a fixed or variable rate, and the monthly commitment can be reduced by the inclusion of a balloon payment.

Lease Purchase

It is very easy to confuse this product with a lease. A leasing agreement gives a company full use of an asset for an agreed period of time at an agreed monthly or quarterly rental.
Lease Purchase is practically identical to Hire Purchase, the only difference being that you typically pay a deposit as a multiple of the repayments. The remaining balance and interest is repaid in instalments.

Your eligibility for the VAT and depreciation allowances is exactly the same as for hire purchase, and you can expect the fee structure to be the same.

Lease Purchase agreements can also be based on a fixed or variable rate, and monthly payments can be reduced by the inclusion of a balloon.

Contract Purchase

This is just a branded variation of the Hire or Lease Purchase facility. At the end of the agreement there is a balloon or guaranteed future value specified. This final value means that the amount you have to repay in instalments can be reduced.

When you reach the end of the agreement, you can pay the final figure and gain title to the asset, or return the asset to the finance company. If you are having difficulties, it may be possible for you to enter into a new agreement to repay this final figure in instalments.

Often, these types of puchases include a service or maintenance contract within the instalments, for example individuals who require a company car, but wish to fund it privately. As with Hire Purchase, the same rules for fees and tax would apply.

As you are not the owner of the asset, you cannot sell an asset during the rental period. However, as you are generally covering the total cost and hire charges within the primary period, you will be entitled to a share of the sale proceeds should the leasing company allow you to sell on their behalf.