If you are considering using an asset finance solution to invest in new equipment for your business, it’s important to understand that not all asset finance arrangements are the same.

The arrangement you choose needs to align your financial objectives, your company structure, future growth plans, and tax obligations. This blog summarises each of the main types of asset finance, their key features, and potential uses.

If you are ready to request a no-obligation asset finance quote, or to book some time in with our team to discuss your investment plans, contact us today.

What is a finance lease?

Summary: Your organisation benefits from full use of the assets for the lease period without the need for a large capital outlay, but your business does not have the responsibilities that come with owning the asset.

Using a finance lease to acquire assets enables your business to get the equipment that you need without having to pay for it upfront with capital. In some circumstances the opportunity to spread costs over time means that your business can access higher quality equipment than you could afford if only using working capital.

The terms and period of a finance lease can be flexible to match your business’ cashflow, but generally leases tend to be arranged over 3 or 5 years.

Interest rates are dependent on your business’ credit status, the funder’s lending criteria and the type of assets being leased.

Who owns the asset?

During a finance lease, the funder retains ownership of the asset throughout, as well responsibility for maintenance and repairs, but your business benefits from the full use of the equipment.

Your repayments will be fixed throughout and at the end of the finance lease you will have paid for the full cost of the asset as well as interest.

What are the tax implications?

If your business is VAT-registered the lease rentals may be able to be offset against taxable profits, rather than the purchase price.

If your business is not VAT-registered, you might choose to spread the VAT across the lease, increasing the repayments.  

What happens at the end of a finance lease?

When the lease period comes to an end you have options, including continuing to make payments to retain use of the assets (this is called a secondary rental period, selling the asset (receiving a portion of the income from the sale), or returning the asset to the funder to end the lease agreement.

To request a no-obligation asset finance quote, or to book some time in with our team to discuss your investment plans, get in touch.

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What is Hire Purchase?

Summary: Hire Purchase can be a good option if your business wants to spread the cost of the asset over time with minimal upfront costs, but then take ownership at the end of the agreement.

During the term of the Hire Purchase your business will make payments that cover the cost of the asset, depreciation, and interest. These arrangements spread the cost of the investment over time which can make it easier for you to manage your business’ budget, but you have full control of the asset throughout the arrangement.

Interest rates are dependent on your business’ credit status, the funder’s lending criteria and the type of assets being leased.

Who owns the asset?

During the Hire Purchase, the funder retains ownership of the asset, but you have control. The funder may also include optional extras such as warranty, maintenance, or insurance.

What are the tax implications?

A key difference between a finance lease and Hire Purchase is that VAT needs to be paid upfront with a Hire Purchase. However, the VAT can be claimed back on the cost of the equipment if your business is VAT-registered.

In addition, as you have full use and control throughout, you should be able to claim Capital Allowances on some or all the asset’s value from your taxable profits.

What happens at the end of Hire Purchase?

When Hire Purchase agreements come to an end, the last payment has an additional option to purchase fee which transfers legal title from the funder to the business. It’s important to budget for the final payment at the end of Hire Purchase agreements as it can be a significant amount.

What is an operating lease?

Summary: Sometimes referred to as a residual value (RV) lease, an operating lease is very similar to a finance lease but can offer more flexibility.

An operating lease enables you to lease the asset from a funder, but at a reduced cost. This is because the lease payments are calculated based on the difference between the asset’s original cost, and how much it is likely to be worth when the lease comes to an end, i.e., its residual value.  

Who owns the asset?

The funder retains ownership, but you have full use of the asset during the lease. Because you do not list the assets on your balance sheet, operating leases are treated as off-balance sheet financing, which can provide greater flexibility and reduced risk.

What are the tax implications?

VAT can be reclaimed on the lease payments.

What happens at the end of an operating lease?

At the end of an operating lease there are several options. You might choose to purchase the assets, continue to lease them, or return the assets to the funder; you do not have to take on the responsibility of selling or disposing of the assets.

Making the right choice for your business

Asset finance enables you to acquire the assets you need in order to operate at the highest level while also keeping precious capital for other investments.

And, thanks to fixed regular repayments, you can spread the costs over time and manage your cashflow more effectively. Plus, depending on the type of asset finance you use, there are significant tax benefits to consider.

If you would like more information about how asset finance works, how it could support your business’ growth plans, and/or a no-obligation quote, send us an enquiry using the form below.

A member of our friendly and knowledgeable team will be in touch to learn more about your business and discuss your financing options in more detail.

Note: All products and interest rates are dependent on your business’ credit status, the funder’s lending criteria and terms and conditions. It is important to seek independent financial advice before entering into any finance agreement.

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