Asset finance allows businesses to acquire the equipment and assets they need in order to operate that they may otherwise be unable to afford. It can also free up working capital for use in other areas of your business and save you from having to take out a large loan to buy equipment outright.
There are two main forms of asset finance:
- Leasing - renting it over a period in return for fixed rental payments.
- Hire purchase arrangements - an initial deposit is paid towards the cost of the asset and the balance is then paid in instalments over a period of time. At the end of the hire purchase period, you would make a final payment and gain ownership of the asset.
You should think about leasing or renting equipment that has high maintenance costs, can quickly become outdated, or is only used occasionally.
Advantages of leasing or renting equipment
There are several advantages of leasing or renting equipment:
- you don't have to pay the full cost of the asset up front, so you don't use up your cash or have to borrow money
- you have access to a higher standard of equipment, which might be too expensive for you to buy outright
- you pay for the asset over the fixed period of time that you use it, which helps you budget for the future
- as interest rates on monthly rental costs are usually fixed, it is easier to forecast cashflow
- you can spread the cost over a longer period of time and match payments to your income
- the business can usually deduct the full cost of lease rentals from taxable income
- if you have not bought the asset outright, you won't have to worry about any overdraft or other loan taken out to finance the purchase being withdrawn at short notice, forcing early repayment
- if you use an operating lease or contract hire, you may not have to worry about maintenance
- the leasing company carries the risks if the equipment breaks down
- the leasing company can usually get better deals on price than a small business could and will have superior product knowledge
- on 'long funding leases' - finance leases over seven years and sometimes over five years; and some long operating leases - you can claim capital allowances on the cost of the assets
- if you need to upgrade or replace the equipment, you can simply make a small adjustment to your regular payment rather than invest a lump sum upfront
Disadvantages of leasing or renting equipment
However, there are also some disadvantages of leasing or renting equipment:
- you can't claim capital allowances on the leased assets if the lease period is for less than five years (and in some cases less than seven years)
- you may have to put down a deposit or make some payments in advance
- it can work out to be more expensive than if you buy the assets outright
- your business can be locked into inflexible medium or long-term agreements, which may be difficult to terminate
- leasing agreements can be more complex to manage than buying outright and may add to your administration
- your company normally has to be VAT-registered to take out a leasing agreement
- when you lease an asset, you don't own it, although you may be allowed to buy it at the end of the agreement
You may also be eligible for tax reliefs when buying or leasing assets. For more information, see acquire assets and borrow money tax efficiently.