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Advantages & Disadvantages of Asset Finance

Considerable benefits to businesses can be gained by the use of either hire purchase or leasing, but they may not be entirely suitable for every business or for every purchase. This is where careful planning and considerations need to be made:

Certainty

Hire Purchase and Leasing agreements are a medium term facility, which cannot be withdrawn; this is provided all payments are made. With overdrafts there is a certain amount of uncertainty as overdrafts are repayable on demand but this is removed by using these types of facilities. Please note HP and Leasing are long term commitments and it may not be possible to terminate early as there is normally a penalty charge involved.

Budgeting

The regular nature of the payments and their usual fixed amount helps a business to better manage their cash flow. The business is able to compare the payments with the expected revenue and the profits it generates. If, however, you wish to alter the payment frequency or amount this will have to be agreed in advance with the finance company. Most finance companies can accommodate most businesses particularly if their business is seasonal.

Fixed Rate Finance

In the majority of cases the payments are fixed throughout the duration of the agreement. This allows a business to know what their repayments will be throughout the term of the agreement. This can be viewed as being beneficial in times of low, stable or rising interest rates but can appear equally expensive if interest rates are falling.

Some agreements such as those over a longer period, the finance company may offer the option of a variable rate. In these cases, rentals or instalments will vary with current rates of interest but this may prove to be more difficult when budgeting for the level of payment.

Effects of Security

Under both types of facilities the finance company will retain legal ownership of the equipment; this is at least until the end of the agreement. This provides the finance company with better security than other lenders of other types of finance facilities for example, a loan or overdraft facilities.

But do bear in mind the decision provided by the finance company will depend on the credit standing and potential. Because the finance company has security in the equipment / asset this could work in favour and provide a positive credit decision.

Maximum Finance

In most cases a minimum deposit is needed when it comes to Hire Purchase or in the case of a lease advance payments. Depending on the situation and the financial standing of the business it may be possible to ‘trade in’ other assets which they own, as means of raising the deposit.

Use of Resource

Where the small & medium sized companies may possible lean on the traditional methods of funding there businesses. Leasing and Hire Purchase can extend the range of finance facilities available to them particularly for the medium term.

But like all important business decisions it is important that you as the Finance Director, Business Owner etc consider the pro’s & cons of the different variants of finance available, against the benefits provided.

But remember Hire Purchase & Leasing can exclude the need to tie up that valuable working – capital in equipment, machinery, vehicles etc. By simply spreading the expenditure to coincide with the expected cash generated profits achieved by the business.

Tax Advantages

Leasing and hire purchase provide you, the company a choice of how to utilise that advantage of Capital Allowances. A Company can claim Capital Allowances through hire purchase or indeed if the equipment has been purchased outright.

If it is not in a tax paying position or pays corporation tax at the small companies’ rate, then a lease could be more beneficial to the business. The leasing company will claim the capital allowances and pass the benefits on to the business by way of reduced rentals.

Leasing an aid to sales

In this type of facility there is a relationship between the supplier and manufacturer of the equipment. When the supplier / manufacturer sells some equipment, a leasing facility would be offered as a potential solution for funding the equipment.

All the adverting and marketing of the finance facility is undertaken by the supplier of the equipment. The finance company will not have any direct dealing with the commercial customer until it confirms approval of the leasing proposal. It is worth noting that this form of the lease can have additional services, i.e. maintenance can be built into monthly.

The Agreement

Consider whether the length of the agreement matches either the period you will need the asset for or the useful life of the asset. It is also important to know that if you the customer wishes to settle the agreement early, it could work out to be expensive.

It is therefore advisable to read and be aware of all the clauses detailed on the agreement. So that you know what you have committed the business for.

It is important that you are aware of the relationship between the leasing company and the supplier. As if these two entities are different then the finance company may not be bound by what is said by the supplier, except where it is in writing.

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