The difference between Hire Purchase and Leasing
Whatever your line of business, having the right tools for the job is essential. No matter what sector or industry your business works in, keeping your day-to-day operations running smoothly requires a vast assortment of equipment.
If your business is desk-based, you need a computer - and the desk itself. If you are a dentist, you will need your drill, a chair and your x-ray machine. A woodworker will need hand and machine tools. Most businesses will need vehicles.
From high value, high technology equipment to chairs and the kettle for coffee breaks, your business depends on a huge range of items, collectively known as assets.
And when your business needs new or replacement assets, Asset Finance can be the most cost-effective way to provide those assets.
What is Asset Finance?
Buying all the equipment or assets your business needs for cash means a major capital investment. When it’s a big item, like a van or a machine tool, most firms don’t have the funds available as cash. However, Asset Finance can provide the solution.
Asset Finance differs from a conventional loan in one important way. With a conventional business loan you will either need to pay a relatively high interest rate for credit - with an ‘unsecured’ loan, or offer security, something that the lender will take and sell to cover their losses if you are unable to repay. This can be key business equipment, your premises or even your home. The thought of putting your home at risk is daunting, but it does mean less risk for the lender, and consequently a lower repayment for you.
But Asset Finance can provide the ideal solution of a low rate without putting your home or other key items at risk. This is because the funding is secured on the asset itself. So, if you buy a key asset - such as a van - and can’t keep up the repayments because of a downturn in business, the lender will simply take back the van. The lending is ‘secured’ against the equipment or asset you buy.
Asset Finance covers a number of funding arrangements, all of which let you spread the cost of the things you need, and all of which share this technique for reducing your costs. The two most popular are Hire Purchase and leasing.
Hire Purchase – spreading the cost of buying
Hire Purchase - or HP - is a simple way to spread the cost of buying an asset - which means that it is already working to make your business money while you pay for it, in effect paying for itself.
After making an initial deposit in the region of 10% of the asset’s value, you will pay fixed monthly instalments for the agreed term, which generally lasts between 12 and 72 months. The installments cover both interest payments and a proportion of the amount borrowed.
The assets become your property as soon as the final payment is made.
This can make HP the ideal solution for items you want to keep. These can be durable items with a long service life such as catering equipment or production machinery and key business items from a dentist’s chair to a tractor.
However, buying an item can mean being left with an obsolete or worn out piece of equipment which will become a liability for your business when better and newer models are available.
Leasing - renting the latest equipment
You may prefer to lease equipment. A lease is an agreement conveying the right to use the asset for a period of time set out in the contract. The party that gets the right to use the asset is called a lessee and the party that actually owns the asset, but leases it out, is called the lessor.
There are two main types of leases.
Operating Leases work like a rental agreement. The asset will not become yours, but you will pay a monthly rental charge to use it. This can have some advantages when it comes to company accounting, as you will never need to make a capital expenditure on the asset.
Maintenance, repairs and registration can be the responsibility of the leasing company. Operating Leases can be ideal for technical equipment with a limited life that you do not wish to own outright. Some types of medical and scientific instruments, which may quite quickly become obsolete, may be suitable for an Operating Lease, as it can allow them to be easily replaced.
Finance Leases also let you borrow equipment for a set time, but maintenance, repairs and running costs will become your responsibility. Finance Leases are common with larger assets, such as complete factory plant installations.
Getting the solution you need
Asset Finance can let you spread the cost of all kinds of business equipment, so naturally, this means there are many different types of Asset Finance and many different providers. However, not all providers work in every sector, and terms and rates vary substantially.
Getting the right type of Asset Finance for your needs is essential.
At Rangewell, our team includes Asset Finance experts. They can help you find the most appropriate kind of finance arrangement, the lenders who work in your sector, and the most competitive deals.
To find out more about working with Rangewell to find better answers to your HP and leasing needs, simply call us or apply today. Our service is free.