What is Asset Finance?
We can source funding for businesses looking to buy assets for their business or spread capital costs.
Do you need to buy plant, machinery, vehicles, IT or other capital goods?
Do you have a shop fit-out or other capital cost?
- If you are buying a new asset normally you will pay something towards the purchase (the deposit), you will pay interest and/or capital during the use of the asset (effectively as a “hire”), and if there is a balance left at the end of the agreed term of finance you will pay a “balloon” i.e. a final payment representing the amount still owed to the funder.
- You do not own the asset until the last payment is made, together with any option to purchase fee, however once this is paid the asset is yours.
- You can claim capital allowances against tax
- The asset value may well depreciate during the period of hire.
- Normally fixed interest rates, so you know your costs per month
- The finance company buys the asset, they are the lessor
- You are the lessee or hirer
- The finance company hires the item to you and you pay the finance company for the hire of the asset for an agreed period which usually reflects the life of the asset, so that by the time it is worth nothing, there is nothing outstanding to the finance company.
- You are responsible for the asset, so you would organise maintenance, servicing etc.
- You can depreciate the asset in your accounts (capital/writing down allowances), however it does not qualify for “Annual Investment Allowance”.
- At the end of the lease there are different options – you could enter into a secondary lease period, you could return the asset to the lessor, or the asset is sold to a third party by the lessee with the permission of the lessor.
- If the asset is sold then the lessee would normally be given the value of the item less any costs incurred by the lessor or any amounts remaining due to them.
- If the asset is not sold and a secondary lease is desired, because the finance company has recovered the value of the asset through the initial rental period, they will often agree to enter into a secondary rental period at a much lower cost.
- A finance lease is typically used where the lessee is going to use an asset and needs to just be able to hand it back in whatever condition it is in at the end of the period, no matter how hard a life the asset has had. The lessor is also not too concerned about the state of it because they have charged a hire to the lessee that reflects it being worth zero at the end of the period.
- With an operating lease, the lessor (the finance company who buys the asset initially) is expecting the asset to have value at the end of the lease (known as the residual value). The lessor has to calculate this carefully to try and ensure that the value they predict at the end of the lease is a correct, because they will not be recovering the full value of the asset from the lessee.
- The lessee enters into a lease period on the asset, uses it and then hands it back.
- Operating leases are often provided by the original manufacturers of the asset – for example a truck or a digger – and therefore come with a maintenance package so that the asset comes back to them in a maintained condition, and also the lessee has had one thing less to worry about.
- The lessee has no title to the asset and cannot depreciate the asset in their accounts.
Cost & Considerations
- Typically there will be arrangement fees and option to purchase fees. For significant or bespoke assets there can be a need for a valuation.
- Where assets are financed, typically the lender can repossess the asset if payments are not maintained.
If you would like us to help you source Asset Finance contact us here.