When running a business, a question that most owners or decision-makers have to make is what they should do when they need to purchase new machinery or equipment.
Should I go down the rental route or purchase it?
Usually, the decision comes down to the concerns of your business’s cash flow.
With mandatory monthly outgoings, including insurance, rent and wages, all having tight deadlines regardless of whether your customers are paying their invoices on time, the pressure surrounding cash flow when new assets are needed can affect the most judicious of owners and directors.
So, what is asset finance?
It is one of the renowned ways to ease the burden of raising funds for your business.
There are different variations of asset finance, from Hire Purchase to leasing and contract hire, but all types of asset finance will allow you to spread the cost of your new equipment and machinery.
The range of asset finance products available means that payments can be scheduled into controllable monthly amounts and that the investment will be more affordable for your business and cash flow.
And that’s not all.
With asset finance, you won’t have to tie up your funds for a prolonged period of time on products that have unstable resale values.
Asset finance is especially useful when being used to fund major capital costs such as maintaining or replacing depreciating business assets, be that new computers, new machinery or new vehicles – all assets that are imperative for your business to continue to grow.
Almost £33bn of UK investment in machinery, equipment and purchased software was through asset finance in 2017.
For that reason alone, the decision you need to make shouldn’t be whether asset finance is the way to go, it should be which type of asset finance will be most beneficial to your business.
Whether that’s hire purchase, finance leasing, operating leasing, contract hire or contract purchase, each one will have individual benefits to your business.
What’s a Hire Purchase?
The most vanilla of the types of asset finance, Hire Purchase is perfect if you want to pay for your new machinery or piece of equipment by monthly instalments.
Using Hire Purchase, you will eventually become the outright owner of the asset after paying the value of it off over a set term, which means that you won’t have to take a lump sum from your business to pay for it straight up.
The asset won’t be yours until you’ve paid off the full value, but you will still be responsible for the maintenance of the equipment.
However, as you will be treated as the owner, you could claim capital allowances and defer your VAT for up to three months, so you don’t have to pay the VAT until three months after the purchase date.
What’s the difference between that and leasing?
If you’re looking at getting a new piece of machinery or equipment that is likely to have a short lifespan, then getting it on a finance lease basis may be better suited to you.
Under a finance lease, which is also known as rental or hire, you will never hold full ownership of the asset.
However, like a Hire Purchase, you will be responsible for the maintenance of it.
There is also a different type of leasing called an Operating Lease.
This works in a similar way to a normal lease, with the main difference being that you only rent the asset for what’s known as it’s ‘useful life’ – basically the amount time that it’s considered suitable for business use.
How much you pay for the asset will depend on the purchase price and the value that it is predicted to be worth at the end of the agreement.
Payments on this type of agreement tend to be lower as they won’t cover the full cost of the asset, as you’re only using it for a shorter period of time and won’t own it afterwards.
There are a number of ways that your business could use asset finance to make its next purchase without taking a lump sum out of its cash flow.
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