Asset Finance and Business Finance Explained
A business is made up of many different assets. Some businesses are asset rich, and need to be in order to best serve their customers, others have very few assets (such as internet businesses), but in most cases almost all businesses will need a range of basic assets in order to need the needs of their customers. An asset can be classed as many things, and can include computers, printing equipment, software licenses, heavy plant and machinery, vehicles, garage equipment, office furniture, storage, and so on, basically anything physical that can be used towards the daily running of the business.
Paying for assets outright with cash can often place a strain on the working capital of a business. It can also reduce the future opportunities for the business due to a lack of available funds at their disposal at short notice.
This is often why businesses look at Asset Finance as a viable alternative to buying assets outright, thus keeping their much needed working capital at the bank and spreading the cost of their acquisition over several years instead.
The Options available to businesses considering asset finance:
When acquiring an asset for your business, there are generally 3 options:
• Purchase outright with cash, credit card, business loan or an agreed overdraft facility
• Lease/Hire Purchase
• Lease Rental
Each option has its own associated advantages and disadvantages attached:
PURCHASE OUTRIGHT:
Advantages of outright purchasing your business assets
• You own full title the asset as you have paid for it in full and therefore cannot be repossessed – the only exception is if a charge has been taken over the asset in return for credit.
• The asset is owned by your business from a tax perspective, therefore you are entitled to claim capital allowances.
ent coming out
• The funder you are using for your finance will usually obtain better discounts on finance due to their economies of scale, this is usually passed onto you as the customer.
• Usership not ownership – avoid heavy servicing and repair bills for old plant, equipment and technology
• Forget depreciation costs – and forget the problems of trying to sell old equipment at a decent price – simply hand it back at the end of the lease
Disadvantages of lease purchase/hire purchase:
• Leasing means that your business will be legally tied into a finance agreement, and payments must be made on time each month otherwise this will affect your credit rating and your ability to secure further finance in the future.
• Leasing can sometimes be more daunting than buying outright, due to all the paperwork required in finance comparison to simply purchasing the equipment by invoice
• Businesses normally have to be VAT-registered to take out a leasing agreement.
• The asset you are leasing is not owned by your business, the exception being hire-purchase which involves making a final payment after your payment obligations have been met in full and the lease has ran the full duration of its minimum term.
Popular reasons that make many businesses chose a finance lease to acquire their equipment:
You can finance most types of business asset – Choosing a reputable funder means they can offer you a fully managed solution for many different business assets, from IT, software and hardware, to garage equipment, catering equipment and heavy plant machinery
The title of the asset being leased is retained by the lessor and the leasing payments are calculated based on the total invoice value of the asset. Lease rental is the most common form of leasing when it comes to financing equipment for businesses. There may be an option to extend the rental period at the end of the term into a secondary period, whereby the lessee continues to rent the equipment from the lessor. In some circumstances title of the equipment may also be sold to the lessee for a nominal sum via a third party.
Contract/Hire Purchase/Lease Purchase
Contract purchase is the commercial equivalent of hire purchase. The asset is owned by the “hiring” company until the final payment is made at the end of the term at which point title passes to them.
Operating Lease
longs to the lessor who rents the asset to the lessee over an agreed period of time, which is typically between 2-5 years. The lessor will look at the residual value of the asset and take this into consideration when calculating the lease payments to the lessee. As the lessor will typically look to sell or rent the asset again after the lease runs its full course because the lessor knows it still has a residual value attached to it, they can therefore reduce the lease payments to the lessee, safe in the knowledge that the lessor can realise additional profits once the lease finishes. Operating leases are often used by government bodies, councils, etc for larger core equipment and assets. Often the lessee will look to continue the rental of the asset after the initial fixed term reaches an end.
Contract Hire
Can be viewed as another form of operating lease (commonly found in use with vehicles) which includes many service and warranty features like maintenance, replacement during repair, complete vehicle management, tyres, etc. As with an operating lease, the lessor owns title to the asset for the whole duration and the rental calculation is based on a residual value of the asset over an agreed period of time, taking into consideration natural depreciation of the asset. Post source:- http://www.article-buzz.com/Article/Asset-Finance-and-Business-Finance-Explained/523023
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Posted on January 29th, 2010 in Uncategorized | No Comments »