THE PROS & CONS: ASSET FINANCE VS LOAN
ASSET FINANCE - HIRE PURCHASE (HP) & LEASING
Hire purchase and leasing should not be confused, although they do tend to offer a similar way of acquiring machinery, equipment and vehicles. The key difference relates to who owns the asset/equipment and, consequently, who can claim the VAT back.
Hire purchase means you will eventually own the vehicle or equipment, but not until the final payment has been settled. It allows the purchase of vehicles and equipment over a fixed period with monthly payments.
There are two forms of leasing: lease purchase which enables the vehicle or equipment to be purchased over a fixed period and it belongs to you; or contract hire, basic leasing where the vehicle or equipment is not yours and is delivered back to the lessor when the agreement finishes.
Cashflow: Allows you to spread the cost of purchasing assets for your business. Interest is usually fixed which allows you to know exactly how much you will be spending
Suitable for purchasing both new and used assets
If you’re unable to continue with the repayments, only the asset in question is removed, other parts of your business remain unaffected. However, be warned, you would remain liable for any shortfall and could have a county court judgement issued against your business
Easy to access and often fast to receive
More expensive than using cash in the long-run due to interest and service charges. Interest rates are usually more expensive than traditional loan rates
The asset forms part of the security, so will be removed should you fall behind on your repayments
Usually requires some form of upfront cash payment in the form of a deposit
Cancelling the agreement in the event of the asset becoming obsolete may be costly
Bank loans can be a good alternative to help fund an asset purchase. Bank loans tend to be either secured or unsecured.
Secured means there is a legal charge or debenture against the assets of the business or the owners and is usually cheaper than an unsecured loan.
But, remember, any assets pledged as security are at risk until the loan is repaid or renegotiated. Unsecured debt tends to be for a shorter period and costs more than secured.
Traditionaly, bank loans are typically on the lower end of interest rates, especially when secured. They often have lower interest rates than asset purchase agreements
Fixed interest rates are available and therefore you will be able to predict your future monthly payments
By purchasing an asset with a loan you immediately own the asset and can therefore do what you wish with it
Using a bank loan effectively makes you a ‘cash’ buyer and potentially able to negotiate reduced prices/better terms from the seller
Loans are often secured against the assets of your business both on a fixed and floating basis, and therefore if you fail to make repayments, these may be repossessed by the bank. Additionally, you may be required to provide your personal assets as security
By purchasing an asset with a bank loan, you are immediately responsible for any maintenance outside of warranty
The application process can be difficult, especially with traditional banks, with the business often having to provide P&L and cashflow forecasts, as well as business plans proving where repayment will come from
There are various costs involved such as arrangement fees, interest and early settlement fees
This document is intended to be an aide-mémoire to help you consider different forms of finance and which ones might be appropriate for your business; it is not a comprehensive guide to all forms of finance. There could be different tax and legal implications associated with different forms of finance. Professional tax and legal advice should be sought to prepare for these different forms of finance.