Asset Finance

Asset Finance is a form of finance that allows you use of an asset without having to pay the full price of that asset 'up front'.

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Key Features

Ownership of the asset remains with the lessor (the finance company) who grants 'right of use' for a specified period in return for regular leasing payments. All forms of leasing are in essence rental agreements with the finance company.

The two main types of leasing are:

Direct lease - the leasing company buys an asset (new or used) determined by you and allows you to 'rent' the asset from the lessor.
Sale and leaseback - Allows you to sell an asset that you already possess, whilst still having access to use the asset.

Some leasing companies offer you an end-of-lease option allowing you to either renew the lease or act as an agent for the lessor when selling the asset to a third party.

Who is it for?

Asset Finance is suitable for all kinds of businesses from sole-traders to public limited companies and our providers are able to provide finance solutions, valued from a few thousand pounds, to millions. Most lessors require your business to be VAT-registered.

Benefits

Improved cash flow - allows you to spread your costs over a longer time than outright purchase with instant access to the asset, minimising strain on your working capital
No risk of capital loss - zero risk of not being able to resell the asset at the end of its life
No debt - a leasing agreement is legally classified as an expense
Cost & cash flow management - as leasing payments are set at a predetermined rate, they are easy to predict and budget
Financial leverage - instead of using cash on asset purchases you will have capital available to the business
Tax advantages - Lease payments are made with pre-tax money allowing you to make significant tax saves.
No risk - the lessor carries most of the risk associated with owning the asset
Additional advantages - some leasing companies offer maintenance and asset management service as part of the offer

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Things to watch out for

Legal ownership - unless you have a hire-purchase leasing agreement you do not actually own the asset
Asset depreciation - if you have to return the asset at the end of the period it is important to consider the condition of the asset
Notice periods - if you have signed a lease which gives you the option to renew the contract be wary of automatic renewals
Asset maintenance - you could be responsible for the 'up keep' of the asset. If so make sure that your leasing company does not demand an unreasonably high level of maintenance
Purchase option - if hire-purchasing ensure you negotiate the repurchase of the asset at a predetermined price. By doing so you will avoid unnecessary negotiations towards the end of the contract.

What are the next steps?

Weigh the 'pros and cons' of leasing versus buying the asset
If you decide to lease the asset estimate how long the useful life of the asset will be for your business
Determine what type of Asset Finance is most suitable for your business
Shop around
Sign the contract and be aware of eventual notice periods

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Frequently asked questions

What are the different types of Asset Finance?

Contract hire - typically used for a car or other form of vehicle. This type of agreement requires that you are liable to pay for eventual maintenance and repair of the asset.
Finance leasing - You acquire all financial benefits and risks without the legal title. At the end of the lease you may have the option to receive a share of the sale proceeds you will not become owner of the asset. If you still need to make use of the asset after the period make sure you sign for a renewal option.
Operating lease - Like the above you will not become the owner of the asset when the leasing period expires, nor will you receive a share of the second hand sales proceeds. You will usually be offered a second lease period for a preferential rate (sometimes referred to as 'peppercorn rental')
Hire purchase - After purchase, the legal title of the asset will pass to your business.

If I can buy the asset why should I lease it?

Instead of spending large amounts of cash at once on purchasing an asset you can spread your costs over time and use the cash in other areas of the business.

What kind of assets can be leased?

Virtually any type of asset from computers, office furniture, photocopiers and printing machines, to vehicles and machinery.

What is the lease rate of payment?

The lease rate is simply the regular "rental" payment that allows you to use the asset. The value of the payment is a function of the duration of the lease, the value of the asset and the interest rate.

What is the lease term?

The lease term defines the agreed duration of your lease that is the period of time that you agree to lease the asset from the lessor.

Are there alternatives to leasing?

The main alternatives to leasing are to get a loan or overdraft from your bank. If you take out a loan you should consider the effects on your credit limit and that with a variable interest rate your payments will be less manageable.

Glossary

Direct lease. You identify the asset (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent it to you. (see also sale-and-leaseback)

Economic life (useful life). The period of time during which an asset has economic value and is usable.

Fair Market Value. Price at which an asset is sold and bought in the open market.

Lease. A lease is a contract in which the lessor purchases the asset selected by you and conveys the use of an asset to you for a specific period of time at a predetermined rate.

Lease Rate. The periodic rental payment to the lessor for the use of the asset. The lease rate is primarily determined by the total cost of the asset, the duration of the lease and the interest rate level.

Lessee. The lessee is the user of the asset being leased, i.e. you.

Lessor. The lessor is the party who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals, i.e. the leasing company.

Master lease. A contractual arrangement which allows you to lease other assets under the same basic terms and conditions without negotiating a new contract.

Purchase option. A provision by which you have the right to purchase the asset at the end of the lease term, either at a predetermined amount or its fair market value.

Residual value. The resale value of the asset at the end of the lease.

Sale-and-leaseback (also called purchase leaseback). You sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back (see also direct lease).