Finance Types

Asset Finance

Asset Finance

Acquiring a new business asset outright can tie up large amounts of capital up front, so it may not be the most efficient use of a business’ available resources.

Asset finance offers alternative ways to acquire many different types of assets that a business may need, including equipment, vehicles, machinery, plant, tools and other assets. It can allow a business to access the most up to date equipment and technology without a large capital outlay or impacting on cashflow.

Asset finance for businesses is available from a range of different finance providers, including both banks and specialist non-banks. Different types of asset finance are available, including:

  • Contract hire: The simplest form of asset finance available to businesses. The client business rents an asset for a fixed term paying a fixed monthly sum for its use after which the equipment is returned.
  • Hire purchase: At the outset of the facility, the asset finance provider owns the asset and the client business will pay the full cost of the asset over a defined period. After that period the business will own the asset.
  • Finance lease: The client business enters into a long-term rental agreement which will allow it to use an asset for a fixed period and for a fixed monthly rental cost. The client business (lessee) is responsible for maintaining the asset. The business will not own the asset at the end of the contract. However, it can enter another agreement to continue using it or will have the option to purchase the asset for a pre-agreed sum. A finance lease may offer more flexibility and a lower monthly cost than an HP agreement.
  • Operating lease or equipment leasing agreement: The client business rents the asset for an agreed period of time. Only the right of use is transferred, however, and the leasing company (lessor) is responsible for maintaining the asset during that period. There is no option to acquire the asset and the equipment will be returned to the lessor at the end of the agreement.

Operating and finance leases are generally treated differently for accounting purposes. A finance lease essentially provides the client business with ownership of the asset, and the leased asset and payments due under the lease should be recorded on a client business’s balance sheet. An asset subject to an operating lease should be recorded on the leasing company’s balance sheet with only the payments due under the lease reported by the client business.

Minimum terms for asset finance are usually for a year, but most are for two to three years or longer. If payments under an asset finance agreement are not maintained or if any other parts of the agreement are breached (for instance, failure to insure the asset), the finance provider may repossess the asset.

The focus on the asset means that asset finance can complement other types of finance.

Further information about asset finance can be obtained from the Finance and Leasing Association: www.fla.org.uk