“Asset finance” is a term used to describe leasing and hire purchase solutions for businesses. It is the most common type of external finance used by SMEs with over 50 employees (Source: BDRC SME Survey 2018). Leasing or hire purchase was also used by 24% of SMEs with 10-49 employees.
Asset finance products allow firms access to equipment which might otherwise be out of reach due to lack of cash flow. They usually involve paying a regular charge for use of an asset over an agreed period of time, therefore avoiding the full cost of buying outright.
Assets financed in this way can range from the small, such as coffee machines, to trucks and large plant and machinery.
How it works
Leasing gives the customer access to new equipment by renting it for a contracted period, without owning the asset. Hire purchase is similar but the customer takes ownership of the asset after all payments are made.
The leasing company (lessor) buys and owns the equipment on behalf of the customer (lessee). The customer pays a rental for the use of the equipment over a pre-determined period. There are two main types of lease:
• A finance lease transfers all the rights and obligations of ownership (like maintenance and insurance) to the lessee, and over the lifetime of the agreement, the lessee will have paid at least 90% of the fair value, or market value of the asset;
• An operating lease is appropriate if the business does not need the equipment for the entirety of its working life. The leasing company will take it back at the end of the agreement and will be responsible for maintenance.
Please see the Asset Finance Key Fact at the bottom of the page.
Why use asset finance?
Asset finance extremely flexible and can be used to fund any asset – ranging from telephones and photocopiers to forklift trucks and aircraft. It could be the perfect solution if your business needs new equipment that might otherwise be unaffordable. The various forms of asset finance provide a number of advantages for the customer:
• They give businesses access to the equipment they need without incurring the cash flow disadvantage of an outright purchase, this means business have access to the latest equipment which may be more efficient than older equipment.
• Finance agreements can often be tailored to the business’ needs, with flexibility on both the term and repayment schedule
• Leasing and HP are excellent budgeting tools as payments are usually fixed, allowing improved cash flow management
• Asset finance providers often specialise in a particular type of asset about which they have expert knowledge
Useful Guides can be found below.