Business Finance Series – What is Asset Finance? – Part 3
There are numerous ways that you can fund your business. In this series of blogs, I’m looking at one of the options namely, Asset Finance.
I started the series by providing a general introduction to asset finance and looked at the different types of assets that can be funded and the different types of asset finance options that are available.
And over the next few weeks, I’m looking at each of the different asset finance options in turn, examining how they work in detail and discussing the ‘pros and cons’ of each option.
This week we continue the series by looking at finance lease.
What is it?
A finance lease is a contract between a finance company (the lessor) and you the business owner (the lessee). As the lessee, you require the use of business equipment, vehicles or machinery, and the lessor provides the use of such equipment in exchange for pre-agreed regular payments. A finance lease is an option that many businesses take when buying expensive equipment outright just isn’t an option.
The key point with a finance lease is that the asset remains the property of the finance company, throughout the term of the lease. And you, as the business leasing the asset, have exclusive use of the asset for the period of the agreement, during which time you are charged a monthly rental fee.
The other point to be aware of is that with a finance lease, the asset will appear on your business’s balance sheet, with all outstanding rentals represented as a liability.
Dependent on the terms of the agreement, at the end of the finance lease contract, the finance company is likely to give you the opportunity to extend the lease for a further term and you continue using the asset. If an extension to the finance lease is not required the alternative is to return the asset to the finance company and the contract will end.
There is also the option for you to sell the asset to a third party on behalf of the finance company and potentially receive a rebate of rentals you have already paid. This is dependent on the amount of the sale proceeds and the agreement you have with the finance company.
The full range of options will be clearly laid out within the terms of the finance lease agreement you sign.
Pros and cons of a finance lease agreement:
- Regular monthly payments
- Minimal upfront deposit
- The monthly payments under the lease agreement are usually corporation tax deductible
- Having this additional line of finance will not affect your core banking arrangements
- Option to carry on using the asset at the end of the term
- You never own the asset
My Advice – One point worth mentioning, is that under the terms of a finance lease, you as the leasee will be responsible for any maintenance or servicing of the asset that is required during the period that it is in your possession.
One option you can consider to help off-set this potential extra cost is to set-up a separate maintenance contract, and this is something you can discuss with the finance company at the time when you take out the agreement.
It is also important to point out that under the terms of a finance lease, you as the leasee will be held accountable for any damage caused to the asset. It is therefore important to ensure you put an insurance policy in place to cover the asset in question, which means all potential damages that could arise furing the life of the finance lease are covered.
We’ll continue the series next week by taking a look at a contract purchase as a potential funding option.
In the meantime, if you are looking to purchase an asset for your business, or you would like to release funds into your business by utilising an asset you already own, then why not talk to an expert. Email us at firstname.lastname@example.org or give us a call on 020 8949 2122 and let’s see how we can help.