Paying cash up front for brand new equipment or machinery can be expensive and could be a risky move that causes cash flow problems. Some companies simply don’t have the working capital for a big purchase. Asset finance is an area with lots of choice.
Hire purchase
Hire purchase is a simple way to purchase an asset and spread the cost over time. You pay in instalments, which means the item appears on your balance sheet, and because you own the asset you'll be responsible for maintenance and insurance costs — but you'll also have full ownership of the item after the term ends.
Equipment leasing
The lender buys the asset you need, and rents it to you on a lease. That means you have it straight away, and only need a fraction of the total amount up front. Generally, you have to pay the first month’s rent, spreading the VAT over the whole period. At the end of the lease, you can either continue leasing the item, buy it outright at an agreed price (factoring in money already spent), upgrade to a new piece of equipment on a new lease, or simply return it.
Many businesses find leasing a good arrangement because as well as spreading the cost over time, you can adapt to your company’s situation. For example, say a delivery company leases a van, and at the end of the term business is booming — they could get a larger vehicle on a new lease, or a package deal for multiple vehicles.
Many businesses find leasing a good arrangement because as well as spreading the cost over time, you can adapt to your company’s situation. For example, say a delivery company leases a van, and at the end of the term business is booming — they could get a larger vehicle on a new lease, or a package deal for multiple vehicles.
Finance leases and capital leases
A finance lease, or capital lease, falls somewhere between hire purchase and equipment leasing. It's a longer-term lease designed for most of the asset's life.
You get full use of the asset and pay for the full value over time, but don't technically own it — so it does not appear on your balance sheet. That means it's possible to offset rental costs against profit and claim VAT — which could be tax-efficient depending on your situation.
You get full use of the asset and pay for the full value over time, but don't technically own it — so it does not appear on your balance sheet. That means it's possible to offset rental costs against profit and claim VAT — which could be tax-efficient depending on your situation.
Operating leases and contract hire
Operating leases, or contract hires, are a more familiar form of equipment leasing. An operating lease is basically a rental agreement with a set term, and maintenance will normally be handled by the lease company (or 'lessor'). Like finance leases, an operating lease won't appear on your balance sheet (which might confer some tax benefits), but operating leases can be cheaper because you don't pay for the full value of the item.
HELPING FUND BUSINESS, PROPERTY AND VEHICLE FINANCE
