Asset Finance

What is Leasing and Asset Finance?

The definition of leasing and asset finance is the use of credit or leasing facilities to acquire possessions or property for your business. The leasing or asset finance provider will require security to be taken on the asset and this is usually independent of any other security, the cost of is spread over the lifespan of the asset being purchased.

Assets for your business that can be acquired this way normally have a readily realisable resale value and so are classed as tangible assets usually.

Leasing and Asset Finance – The Benefits

Once you find a provider for your business leasing and asset finance facilities are quite straight forward to organise. The cost of the asset can be linked to the amount of income it generates. Cash flow management can be simplified as the rental is agreed at the time an arrangement the leasing or asset finance is finalised. Since the leasing or asset finance agreement is a stand-alone facility other lines of credit are not involved and so it doesn’t affect working capital.

In comparison with other financing options leasing and asset finance has some distinct advantages.

Leasing & Asset Finance versus Bank Loans

Any borrowing from the bank to finance assets will take up some of the credit available to your company from your bank and will probably have an impact on your ability to extend any overdraft facility to be used as working capital. Compared to this a lease is unlikely to have any impact on the credit facilities available to your company.

Any company assets financed by funds from a bank have to be shown on the balance sheet and the bank can also ask for more security such as a debenture over book debt or a charge over freehold property. The assets can also have writing down allowances applied but only the interest charges on a bank loan can be claimed against tax; contrary to this leasing payments can all be offset against any taxable profits.

A lease finance company cannot ‘foreclose’ on the leasing arrangement whilst payments are being made whereas bank loans are normally repayable on demand.

Leasing & Asset Finance versus Bank Overdraft

A bank overdraft should only be used as a short term means of providing finance to fund working capital in a company and is not suited for long term borrowing or financing asset acquisition. Interest on a bank overdraft and is normally variable depending on the bank base rate and is usually calculated daily, repayment of a bank overdraft is on demand.

An asset finance arrangement or leasing can make budgeting significantly easier. At the outset of the leasing or asset finance arrangement payments are normally fixed and do not vary irrespective of changes in the bank base rate do the monthly payment is constant. This simplifies cash flow management and financial forecasting within the business.

If you do use overdraft facilities to finance any assets these will have to be shown on the balance sheets and as with bank loans writing down allowances can be applied. You may be able to claim that part of the overdraft interest applied to the acquisition, again leasing payments in comparison can all be offset against taxable profits.

Leasing & Asset Finance versus Cash Purchase

The use of cash within the business to make an outright purchase of an asset will have an immediate effect on cash flow and in turn could reduce financial resilience within the company. Leasing assets leaves cash within the business allowing for greater versatility and the true cost of leasing actually reduces across time as the value of money reduces in line with inflation.

The assets financed by cash will have to be shown on the balance sheet although the asset value may be written down by the appropriate amount each year.

Leasing or asset finance however allows all the payments associated with a leasing or asset finance arrangement to be offset against taxable profits each year.

In these days of increasing technological advances, leasing provides a business with a means of adapting to technological change, allowing assets to be upgraded or added to in line with changes in demand within the business.