Leasing and hire purchase are the most popular types of finance used in the UK and are particularly useful for SMEs looking to get important equipment and machinery without large upfront costs that can often put a strain on working capital.
The Business Finance Guide spoke with Simon Goldie, Head of Asset Finance at the Finance & Leasing Association (FLA), about asset finance and how it can support business growth.
What is asset finance?
Simon: It’s the collective term for leasing and hire purchase – the main types of finance used by businesses to obtain a range of assets, covering everything from office equipment to vehicles, which allows the business to access the assets it needs and manage its cashflow.
With leasing, there are two types of leases:
- Finance lease – if the asset is to be used for most of its working life.
- Operating lease – if the asset is needed for a shorter period than its full working life.
Hire purchase is where you pay a monthly rental and at the end of the term you own the asset.
Do many businesses use asset finance?
Simon: Absolutely – the asset finance industry has seen eight consecutive years of growth, proving that it’s a very popular and versatile funding option.
Why is it so popular?
Simon: Asset finance is a low risk funding option – leases and hire-purchase agreements are secured wholly or largely on the asset being financed, so the need for additional collateral is reduced. There’s also more security for the user because the finance can’t be recalled during the life of the agreement, provided that the business keeps up with payments.
How does it work?
Simon: If a business needs access to new equipment, machinery or hardware, but doesn’t necessarily want to buy the assets outright and own them forever, then leasing would be a good option.
In this case, a leasing company buys and owns the equipment, and the business rents it for an agreed period.
Typically, a lease contract has a set interest rate, which is a real bonus when budgeting or planning expenditure.
If a business does eventually want to own the equipment, but doesn’t want to tie-up its working capital, then hire purchase would be the best option.
A finance company would buy the equipment on behalf of the business, which would then have use of the asset while repaying the cash price plus interest. Again, these agreements usually have fixed interest rates, which makes them great when budgeting.
What kind of things can be acquired on asset finance?
Simon: Pretty much everything from basic office equipment, like desks and phones, through to the most complex and cutting-edge medical equipment, such as scanners, or the latest IT systems.
Who provides asset finance?
Simon: Asset finance is available directly from specialist providers, or indirectly through equipment suppliers or finance brokers. Most of the firms providing asset finance in the UK are members of the Finance & Leasing Association (FLA) and are listed in our directory.
What kind of questions should businesses ask lenders?
Simon: There’s a checklist in our Business Lending Code that reminds potential customers to check that, among other things:
- the agreement corresponds with any verbal or written quotation on the rental amount and period of hire;
- that it accurately reflects what the customer is agreeing to pay for, including any maintenance or services included in the repayments;
- that it describes the equipment the customer is expecting to receive (e.g. whether it is new or used) and that its working life is appropriate to the length of the finance agreement.
The FLA explained
The Finance & Leasing Association is the leading trade association for the asset, consumer and motor finance sectors in the UK, as well as the largest organisation of its kind in Europe. Our members include banks, subsidiaries of banks and building societies, finance arms of major retailers and manufacturers, and a range of independent firms.
Finance at every stage
Business financing is not a one-off decision, but an ongoing and evolving situation. No decision can be made in isolation to the businesses journey. Find out more about what options are suitable now and what might work at another stage.
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