We asked Touch Financial Brokerage Manager Alex Kyriacou for advice on choosing an Asset Finance deal for businesses in the UK.
This Q&A session will talk about Asset Finance products Hire Purchase and Leasing. Equity Release will be introduced in future Q&A Ask an Expert articles although may be referenced here.
1. Asset Finance is a solution used by thousands of businesses every year. What makes a business choose to take out an Asset Finance facility?
Asset Finance makes it possible for a business to spread the cost of an asset over time. New purchases such as equipment, vehicles or machinery can come with a hefty price tag and businesses often want to spread this cost over a period of time to preserve working capital. There is no point having a new, expensive piece of machinery if a business can no longer afford to run it due to running out of cash.
2. What are the most popular forms of Asset Finance products?
Leasing and hire purchase are the most popular forms of Asset Finance. With hire purchase, the business pays monthly for an asset such as a piece of machinery or new vehicle and once the contracted payment period is up, the business owns that asset. The major difference between hire purchase and leasing is that with leasing, you do not own the asset as you would at the end of the contracted period within a hire purchase agreement. Owning this asset means you potentially have access to a lump sum of cash, whether through selling it outright or releasing equity.
3. Why would a business owner want to choose to use leasing over hire purchase if they never own the asset outright?
Sometimes a business will look at the purchase of an asset as a bad long term investment, particularly if a new model of the asset is due to come out in the near future. This can make it a sensible option for the business to rent the use of an asset, known as leasing.
Leasing usually has no deposit, unlike which is required in a hire purchase agreement. Despite the deposit only being between 10-20% of the value of the asset for hire purchase, a significant asset value could mean even this deposit amount is fairly large and unaffordable for the business.
4. How are the repayments calculated for hire purchase and leasing?
Leasing is pretty simple with usually only one cost being involved – the monthly lease charge. Hire purchase, however, includes a deposit, monthly repayments and interest on the repayments. Cost will depend on the deposit amount, value of the asset and length of the contract. By being able to spread out the cash demand of the asset it is often seen as a necessary cost for many businesses. Although a business will likely pay more in the long run, the advantages of the cost being spread out over a number of years can far out-way any additional interest paid on the asset.
5. How can a business minimise the costs and interest rates of an asset finance deal?
Businesses seeking the best value hire purchase agreement will want to consider handing over as large of a deposit as they can afford in order to help reduce the number of payments and interest made for the asset over the long term. Although this tactic does work to reduce the overall interest paid as less time borrowing cash means less interest paid, a business must decide whether taking the interest hit over time is better than losing more cash now.
My best piece of advice for both hire purchase and leasing would be to search the entire market of Asset Finance Lenders before settling on your favourite. Touch Financial have a specialist panel of over 30 of the leading business finance lenders in the UK and will be more than happy to assess the market for you, free of charge.