Leasing and Asset Finance

Leasing and Asset Finance

A leasing or asset finance arrangement makes budgeting significantly easier. At the outset of the leasing or asset finance arrangement payments are normally fixed on a monthly basis and do not vary irrespective of changes in the bank base rate. This simplifies cash flow management and financial forecasting within the business.

Types of leasing and asset finance

Whilst there are a significant number of asset finance and leasing providers, each with their own variations of finance arrangements, all these fall into two main categories namely Finance Leases and Operating Leases.

For leasing arrangements, the provider will normally require a current copy of the trading accounts of the business and between 3 and 6 months of bank statements. In some cases proof of profitable trading for a period up to 3 years may also be required.

Finance Leases

A finance lease option provides you with all the benefits of using an asset but without owning the asset itself. You choose the asset required and lease it from the leasing provider at predetermined payments to suit the cash flow of the business. This gives the business almost immediate use of the equipment for a small capital outlay. The finance lease provider is the owner of the asset and you rent the asset from them. This means you retain your capital within the business.

Finance Leasing – The benefits:

Flexibility – monthly payments can be arranged to suit the cash flow of the company and are predetermined at the outset

Cost-effectiveness – the writing down allowances claimed by the leasing provider are passed on in the form of lower monthly rentals

Capital versatility – capital resources are retained within the business and requirements for working capital funding minimised

Easily managed – the primary rental period covers the capital cost and interest charges on the asset making continued use of the asset simple through annual peppercorn rentals via a secondary agreement.

Normally the only requirements for a finance leasing company are that the business has been trading profitably for a period of up to 3 years as shown in the trading accounts and that bank statements for the preceding 6 months are available.

Operating Leases

Operating lease arrangements are usually best suited to assets with a high capital cost and low depreciation, a long term working life and an established resale market. Whilst you may be able to identify the supplier of the asset, it is more usual for the leasing company to do so as they are often able to negotiate a lower initial price for the asset.

The costs to you of an operating lease normally include a documentation fee and a multiple of rentals at the outset, with ongoing rentals covering the agreement period. The VAT element of the rentals is recoverable if your business is eligible and there is no purchase VAT payable at the inception of the operating lease agreement as the finance company owns the asset.

Because the leasing company is assuming the risk of the residual value of the asset and the finance provided to you via the operating lease only covers the depreciation in the value of the asset, it is unusual for a secondary rental period

Operating Leasing – The Benefits:

Discounted pricing – the residual value of the asset is a risk assumed by the leasing provider and not the business and this is passed on in the form of reduced periodic rental costs to you

Tax efficient – the cost of the rentals can be offset against profits and the VAT element can be reclaimed

Versatility – at the end of the primary period the operating lease provider is responsible for the disposal or resale of the asset and not you.

Normally the only requirements for an operating lease company are that the business has been trading profitably for a period of up to 3 years as shown in the trading accounts and that bank statements for the preceding 3 – 6 months are available.