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UK Asset Finance Options Explained - How To Choose the Right Finance For Your UK Business

Guest post by: Al Shea

Article Overview: This article details the various options available to businesses in the United Kingdom who are looking for asset finance to buy new equipment for their business, but are unsure of the best method to use. Here we discuss the various finance methods available, along with the associated tax benefits attached to each finance method.

UK Asset Finance Options Explained - How To Choose the Right Finance For Your UK Business

Considering finance options for your next business asset? We run through the benefits of asset finance as well as looking at the additional considerations that should be made in order to make the most appropriate financial decision for your business. A business is made up of many different assets. Some businesses are asset rich, and need to be in order to best serve their customers, others have very few assets (such as internet businesses), but in most cases almost all businesses will need a range of basic assets in order to need the needs of their customers. An asset can be classed as many things, and can include computers, printing equipment, software licenses, heavy plant and machinery, vehicles, garage equipment, office furniture, storage, and so on, basically anything physical that can be used towards the daily running of the business.

Paying for assets outright with cash can often place a strain on the working capital of a business. It can also reduce the future opportunities for the business due to a lack of available funds at their disposal at short notice.

This is often why businesses look at Asset Finance as a viable alternative to buying assets outright, thus keeping their much needed working capital at the bank and spreading the cost of their acquisition over several years instead.

The Options available to businesses considering asset finance:

When acquiring an asset for your business, there are generally 2 popular options:

• Purchase outright with cash, credit card, business loan or an agreed overdraft facility

• Lease/Hire Purchase/Rental

Each option has its own associated advantages and disadvantages attached:

PURCHASE OUTRIGHT:

Advantages of outright purchasing your business assets

• You own full title the asset as you have paid for it in full and therefore cannot be repossessed - the only exception is if a charge has been taken over the asset in return for credit.

• The asset is owned by your business from a tax perspective, therefore you are entitled to claim capital allowances.

• The asset has been paid for in full, leaving you free from loan/credit agreements which need to be monitored and notice served by the minimum term.

• Your business does not have to go through any credit checking agencies.

Disadvantages of purchasing your business assets outright

• You are paying for the asset completely up front out of your businesses working capital reducing the capital available to you immediately for other requirements.

• If you pay for the asset outright using your business overdraft, credit card, or bank loan, there are other charges you also need to factor into the total cost of the asset.

• You cannot spread the cost of the asset over time, spreading the cost works well if you need to budget monthly against money coming into the business.

• Your bank has the option to withdraw all loan facilities and demand repayment with very short notice, leaving your business cash-starved.

• You are unable to take advantage of the tax benefits associated with leasing, such as deducting the cost of equipment rentals against your pre-tax profits.

• A small company placing small orders may often find they have less bargaining power due to their smaller economies of scale as a business.

• Through buying outright, a small business is hedging their bets that it will not need the capital currently available to them in the immediate future.

LEASE PURCHASE/HIRE PURCHASE/LEASE RENTAL:

Advantages of lease purchase/hire purchase

• No need to outlay the full cost of the asset up front from your working capital or credit facilities - put your spare capital to use in areas where your business really needs it

• Spread the cost of the asset over a fixed period of time that it is chosen by you (typically 3-5 years)

• Easier to forecast your cashflow as the agreement is fixed term and the monthly amounts won't fluctuate

• You can budget more effectively each month with no unexpected bills, knowing what is coming out of your account to pay for the assets you have acquired on finance

• Your tax liability will be reduced because lease rental can be 100% offset against your pre-tax profits

• Peace of mind that you will not need an overdraft or credit card that may be withdrawn at short notice by your bank

• Service elements, maintenance contracts and other intangible items can sometimes be written into the lease agreement, so you only have one payment coming out

• The funder you are using for your finance will usually obtain better discounts on finance due to their economies of scale, this is usually passed onto you as the customer.

• Usership not ownership - avoid heavy servicing and repair bills for old plant, equipment and technology

• Forget depreciation costs - and forget the problems of trying to sell old equipment at a decent price - simply hand it back at the end of the lease

Disadvantages of lease purchase/hire purchase:

• Leasing means that your business will be legally tied into a finance agreement, and payments must be made on time each month otherwise this will affect your credit rating and your ability to secure further finance in the future.

• Leasing can sometimes be more daunting than buying outright, due to all the paperwork required in comparison to simply purchasing the equipment by invoice

• Businesses normally have to be VAT-registered to take out a leasing agreement

• The asset you are leasing is not owned by your business, the exception being hire-purchase which involves making a final payment after your payment obligations have been met in full and the lease has ran the full duration of its minimum term.

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Article Tags: article details, asset finance, finance options, uk business, united kingdom



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