Asset Finance
What Are The Different Types?
Asset finance is a type of finance used by businesses to get assets and equipment they need to grow. Typically it involves a regular payment for use of the asset over an agreed period of time, therefore avoiding the need to pay the full cost of the asset upfront.
The most common types are:
Hire Purchase
This allows the customer to buy the equipment on credit. In this case, the finance company purchases the asset on behalf of the customer, and owns the asset until the final installment is paid. At that point the customer has the option to buy it for a nominal amount.
Lease
Leasing gives the customer access to new equipment by way of renting for a contract period, without transfer of ownership. The finance company buys and owns the equipment on behalf of the customer. The customer pays a rental for the use of the equipment over a predetermined period.
There are two main types of lease:
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Finance lease - the value of the asset appears on the lessee’s balance sheet and the rental payments pass through the profit and loss account. The full value of the equipment is repaid to the lessor, plus interest, over the lease period.
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Operating lease - more appropriate if the customer does not need the equipment for its entire working life. Payments are made to the lessor for the use of the equipment while it is needed. As the customer only keeps the asset for a limited period, it is not shown on the lessee’s balance sheet.
What Are The Pros?
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Easier to obtain than traditional bank loans.
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Fixed payments make budgeting and cash flow simple to manage.
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Most agreements have fixed interest rates.
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Failure to pay only results in the loss of assets, nothing more.
What Are The Cons?
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There is the risk of losing important assets required for running a business.
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Value of the assets which a loan is secured against can vary, with the possibility of low valuations.
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Not as effective for securing long term funding.