Types of Asset Finance - How to Choose the Right Option

Businesses run on assets. They either manufacture products or provide services by making use of a variety of business assets such as computer systems, photocopiers, office furniture, restaurant equipment, plant, machinery, commercial vehicles, company cars, forklift trucks and buses.

Companies acquire these assets either by purchasing them outright using their reserve cash or through commercial loans or having them financed through asset finance options. Asset financing has become quite popular in recent years since this method allows one to acquire business critical assets without making large capital investments. It also helps businesses to keep abreast of the latest technological developments as they can get new assets as and when they require them without having to arrange for large amounts of funds through commercial loans or some other arrangement.

Asset Finance Types

Operating Lease

In this type of lease, the lessor remains the owner of the asset and he rents it to the lessee for a particular period (ranging from one to five years). Thereafter according to his particular need, the lessee can either renew the lease or return the asset to the lessor. The lessor can then either sell the asset in the second hand market or lease it to some other lessee.

Rent is usually low in this case as the lessor does not need to recover the full asset value. This type of lease works fine with business which are either into seasonal operations or who operate in a business environment where the technology keeps on changing such as IT.

Contract Hire

This is one form of operating lease which is used mostly in vehicle finance. The lease arrangements include service features like maintenance, replacement during repair, management, etc. The rental payout is calculated on the basis of the residual value of the asset after the lease term, thus covering the depreciation over this period.

Finance Lease

In this type of asset finance, the lease period is long and covers the entire working life of the asset. Hence, the leasing payments realize the full cost of the asset over the lease period. When the asset is sold at the end of the term, the lessee will share a percentage of the disposal price with the leasing company.

Contract/Hire Purchase

This is the commercial avatar of hire purchase. In this case the ownership of the asset in question is transferred to the purchaser at the end of the term after the final payment is made.

Lease Purchase

This arrangement is just like a hire purchase contract with one difference – there is one single large payment at the end of the term after which the legal title to ownership is transferred to the purchaser.

Choosing the Right Type

There are separate advantages to all the above types of asset finance options. You have to understand all the options and your needs and circumstances before committing to a particular type. Here is some more help in understanding which would suit you best:

• If it is important for you to own an asset right away, you should go for an outright purchase funded by your own means or through commercial loans.

• If you want to own the asset but not right now, you should go for the hire purchase option. This will keep the outgoings low and steady and will have you owning the asset at the end of the term.

• If, considering the nature of your business, you want to utilize the asset for most of its useful life but don’t want to own it, then financial lease is the best asset finance option for you.

• If you want to utilize the asset for a period of time significantly shorter than its useful life, you should consider operating lease type asset finance.