Asset Finance
Asset finance is used by businesses to get assets such as vehicles or equipment they need to operate or grow their business. Typically it involves a regular payment for use of the asset over an agreed period of time, therefore avoiding the need to pay the full cost of the asset upfront.
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The most common types of asset finance are hire purchase and leasing.
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Hire Purchase
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Hire Purchase allows the customer to buy the equipment on credit. In this case, the finance company purchases the asset on behalf of the customer, and owns the asset until the final instalment is paid. Hire purchase is a tax-effective way to spread deductible costs over time.
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Leasing
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Leasing gives the customer access to new equipment by way of renting for a contract period, without transfer of ownership. The finance company buys and owns the equipment on behalf of the customer. The customer pays a rental for the use of the equipment over a predetermined period.
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There are two main types of lease: Finance Lease and Operating Lease.
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Under a finance lease, the value of the asset appears on the lessee’s balance sheet and the rental payments pass through the profit and loss account. The full value of the equipment is repaid to the lessor, plus interest, over the lease period.
An operating lease, on the other hand, may be more appropriate if the customer does not need the equipment for its entire working life. Payments are made to the lessor for the use of the equipment while it is needed. As the customer only keeps the asset for a limited period, it is not shown on the lessee’s balance sheet.
