There are several types of asset finance and a few minor variations. Each has its uses, benefits and disadvantages but all broadly follow the principles of asset finance given above. A general overview of what’s available follows:
This is a very similar model to hire purchase for individuals. The hire purchase provider retains ownership of the asset to be leased over the term of the agreement and leases it to the business for agreed regular fixed payments. Businesses may make a larger initial payment followed by smaller payments on an agreed schedule. At the end of the agreed period, the business can choose to buy ownership of the item outright with a further payment.
Finance lease (or capital lease)
This differs from some other asset finance in that the business is only ever renting the assets concerned. Again, payment is made with regular payments to an agreed schedule. This normally lasts until the finance provider has recouped the purchase value of the asset. In some instances, the finance company may allow the business to share in a percentage of the sale value of an item once it has been sold. The business does not have the option to purchase the asset outright.
Tax-wise, it may be possible for a business to offset the rental payments against their profits. However, this is not possible with long funding leases. The finance company retains the right to any capital allowances, but the business can reclaim VAT.
There are basically two forms of asset refinancing: the first is simply using a company’s assets (physical or otherwise) as security against a loan.
The second – more properly called asset-based lending – is where a business sells an asset to asset finance provider for an agreed lump sum. The business then leases back the asset sold from the finance provider – thus repaying the lump sum paid.
Asset refinancing differs from a simple secured loan in that a business can use physical assets they may only partially own as collateral, but only up to the level of equity they have in that item.
This form of asset financing relates to vehicles only. A business wishing to expand its fleet will approach a contract hire provider who will source the vehicle(s) required. The business pays a regular amount over the agreed leasing period.
Maintenance and servicing costs remain the responsibility of the provider, rather than the business. For larger companies with multiple vehicles fleet management services may also be included in the base contract hire costs.
Contract hire (also sometimes referred to as vehicle asset finance) carries the benefit of relieving a business of the time and budget-consuming tasks that accompany normal vehicle ownership. The provider is responsible for finding and buying a new vehicle, as well as all maintenance and servicing costs. At the end of the leasing period, the provider also assumes responsibility for the disposal of the vehicle.