THE world of asset finance can be tricky and mind-numbingly confusing at times, so most people could do with a ‘near jargon-free guide’ on vehicle asset finance.
Hire purchase? Lease Finance? Sale and leaseback? What does it all mean, and which one is right for your business, by Dale Trenam, Specialist Fleet Services Ltd, Vehicle Finance Division Sales Director.
If you’re planning to purchase new vehicles, or want to refinance your existing asset, you need to choose the option that meets your business needs.
Here, I have attempted to explain clearly (and with minimum jargon) what each finance agreement requires from you, and what you can expect in return from your asset finance provider.
Probably the most straightforward agreement, Hire Purchase provides you with the option to own the asset outright at the end of the agreement.
It is a widely used finance solution, that allows a company access and use property, and equipment without incurring large cash outflows at the start.
You pay an initial deposit to your chosen asset finance provider, followed by equal monthly instalments throughout the term of the agreement.
Once the last payment is made – together with a final option to purchase fee – you own that asset entirely.
Key benefits of hire purchase include fixed interest at the start of the agreement (which eases budgeting).
Hiring means total control over that asset, and depending on circumstances, VAT on the cost of the asset is reclaimable.
Other benefits include claiming tax benefits of ownership (subject to your tax status) – seasonal payment options are usually available, and the asset appears on your balance sheet.
Similar to hire purchase, leasing is a simple method of financing vehicles, and allows your business to purchase equipment without a big up-front cash outlay.
Lease finance is available in two forms: a Finance Lease, and an Operating Lease. In both cases leasers pay an ongoing rental fee for a fixxed period, and the finance provider retains ownership of the asset throughout the term of the agreement.
The key difference is that with an operating lease, the payments are lower and you hand the asset back at the end of the agreement.
With a finance lease at the end of the term of the agreement, you can enter into a secondary lease period with your finance provider at a ‘peppercorn’ rental.
A key benefit to Lease Finance is it provides a fixed interest rate throughout the agreement, which creates certainty of repayment. Other benefits include asset return at the end of the primary term, with no further liability.
VAT is not payable as part of your deposit, and rental agreements can offer tax benefits – which are structured to reflect cash-flow.
Lease Finance also offers flexible repayment structures, providing immediate use for minimal outlay.
With an operating lease, the primary period is usually less than the full economic life of the asset. The asset still has a significant value at the end of this period, and the
leasing company fixes a residual value for the asset at the outset of the agreement – which reduces your monthly payments.
An Operating Lease’s key benefits include protection from the risk of the asset losing value, while the asset can be an offset-balance sheet – so you can offset payments against taxable profits (subject to imminent accountancy rule changes). VAT can usually be reclaimed on the asset.
Finally, Sale and Leaseback is an effective way to raise money to finance further business growth, by releasing capital through your asset finance provider, to purchase your existing vehicle assets and lease them back to you. Put simply, you sell a vehicle to your finance provider in return for cash. A leasing agreement is then set up, allowing you to continue to use the vehicle asset in return for regular instalments.
A key benefit of a Sale and Leaseback method includes no initial payment or deposit. It injects immediate cash into your business, there is a continued use of asset being financed, and documentation is simple.