A Guide to what is Asset Finance

Small business asset finance explained: the different financing options and their benefits, the costs involved and the variables lenders consider

In order for your business to grow, it is likely that you will need to make a significant investment in a new asset. This could include the purchase of new computer equipment and software, new machinery and equipment, or a new motor vehicle such as a van.

As a start-up or small business you are probably looking at the price of your new asset and wondering how you are going to afford the one off, large payment required to make your purchase. This is where asset finance can help.

Leasing and hire purchase

With asset finance packages, hire purchase and leasing, you can breakdown the payment of your assets into monthly bite-sized chunks. This makes the investment much more affordable and has less of an impact on your cashflow.

What is leasing?

Ownership:

With leasing, you are paying for use of the asset and do not own it at any point.

Advantages of Leasing:

  • At the end of the contract you can simply renew the lease contract, or you may be offered to purchase the asset so you become the owner.
  • You will be able to always stay up to date with the latest version of your asset, for instance after an 18 month contract, when your machinery is out of date and the contract comes to an end, you can take out a new lease with the latest machinery that is available. This may significantly impact on the quality of your product/service you can offer to your customer.
  • Some leasing agreements also offer a full service package which can include repairs and replacements, saving you money and time when things go wrong as the leaser will have responsibility for the asset’s upkeep.

What is hire purchase?

Ownership:

Once the contract is fulfilled, you are the owner of the asset.

Advantages of hire purchase:

  • You do not need to take out a loan, overdraft or favour from your family to find the cash lump sum you require up front to pay for an asset – you will be able to pay for the asset in affordable monthly repayments.
  • You do not require any security or collateral to secure an asset finance deal such as hire purchase.
  • Once the contract is paid off, you will be the owner of the asset. This means you can later sell the asset for a lump sum. Remember though, the price will likely be less than you paid throughout the entire hire purchase facility as depreciation occurs and new models of the asset will subsequently have been released. However, you will at least receive some return for your investment in the asset, unlike leasing.
  • Finance charges for assets are tax deductable which effectively means that the tax man is financing some of the asset for you.

What are the costs involved in asset finance?

As highlighted previously, leasing usually only consists of a single cost – the monthly lease. This makes it simple to calculate in your accounts. Hire purchase, on the other hand, consists of a deposit, plus an interest charge which will be calculated and included in your monthly payments.