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And what is the right choice for your business?
Asset Finance is an umbrella term covering a few different finance facilities. They can be tricky to understand because they do share a lot of similarities, however they all have their distinct uses.
In this article we will be covering the four main types of asset finance: hire purchase, finance leases, operating leases and refinancing. For more in-depth descriptions, please visit our product pages.
Hire Purchase
Hire purchase (HP) is an instalment purchase where the hirer spreads the cost of the item over a set period of time rather than paying the full price upfront. It usually requires an initial deposit followed by monthly payments plus interest over an agreed period. At the end of this agreement, the item is then owned outright by the hirer.
Finance lease
Hire purchase (HP) is an instalment purchase where the hirer spreads the cost of the item over a set period of time rather than paying the full price upfront. It usually requires an initial deposit followed by monthly payments plus interest over an agreed period. At the end of this agreement, the item is then owned outright by the hirer.
Operating lease
An operating lease is a type of finance lease suitable for assets that are expected to have a significant resale value at the end of the lease period, known as the residual value. The lease term is therefore shorter than the asset’s economic lifespan. The customer makes rental payments over the agreed period, but these will not cover the full cost of the asset as with a regular finance lease. Suitable assets may include vehicles and construction plant and machinery. The hirer will not own the asset at the end of the agreement.
Refinance
Asset refinancing is the process of securing a loan against valuable items that your business already owns, like vehicles or equipment. There are a few different types of refinancing including Sale & HP Back and Sale & Lease Back.
A sale and hire purchase back is a refinance solution that involves putting recently purchased equipment back on to a hire purchase facility. This allows you to recover the cost you have spent on your new asset and spread the cost over a fixed term. The lender effectively purchases the asset and finances it back to you and you will own it again at the end of the agreement.
An alternative to Sale and HP Back is Sale and Lease Back. This is similar in the sense that it involves an owned asset being sold to a someone else which is then leased back to the original owner. The previous owner can continue to use the asset but does not have ownership of it.
Still not sure which option is the best for you? Get in touch for a no-obligation chat and we’ll be happy to advise.
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