Asset Finance types

Commercial Asset finance is an umbrella term for a number of more specific finance packages like Hire Purchase, Lease Purchase...

These are the main types of asset finance:

Hire Purchase

Hire purchase is the typical readily available credit facility. In basic terms, you source the asset and negotiate the purchase price with the supplier. You pay the finance company a deposit, typically 10-20%, and the finance company then takes title direct from the supplier.

Even though you are technically not the owner of the asset during the agreement, subject to eligibility you can still claim the writing down allowances as though you had made the purchase outright.

At inception you would usually be required to pay a documentation (or administration, arrangement) fee of £100-250 and the full purchase VAT. You will then, subject to eligibility, recover the VAT yourself. You repay the outstanding amount and interest in pre-agreed installments over the period of the agreement.

At the end of the agreement you obtain title through the payment of an 'Option to Purchase Fee'. This fee is often a token gesture to transfer title, but some asset finance companies do still charge a significant fee of £10-150. Hire Purchase agreements can be based on a fixed or variable rate, and the monthly commitment can be reduced by the inclusion of a balloon.

Lease Purchase

Lease Purchase is practically identical to Hire Purchase, the only difference being that instead of paying a deposit of 10-15% you typically pay a deposit as a multiple of the repayments. The remaining balance and interest is repaid in installments. The number of installments is defined by the pause.

As an example, a hire purchase agreement would have a 10% deposit followed by 36 monthly repayments. The equivalent Lease Purchase would have a profile of 3 payments in advance followed by 33 (if terminal pause) or 35 (if spread pause) monthly repayments.

Your eligibility for the VAT and writing down allowances is exactly the same as for hire purchase, and you can expect the fee structure to be the same.

Again, Lease Purchase agreements can be based on a fixed or variable rate, and the monthly commitment can be reduced by the inclusion of a balloon.

Finance Lease

With any finance lease contract the finance company takes full ownership of the asset and rents the goods to you over a predetermined period. The finance company can claim the writing down allowances and convey this benefit to you by reducing the rentals.

It also worth noting that the purchase price that is being used to calculate the rental is the purchase price net of VAT. Thus, if you are looking to acquire a VAT qualifying car, if leased the rental is calculated on the net price of the car and not the gross price if funded by Hire Purchase.

Generally, with a finance lease, you will source the supplier, and having paid the documentation fee and an initial payment of a multiple of rentals, substantially all of the remaining cost of the asset is spread over the agreed primary period in accordance with the pause.

The rentals attract VAT that can be recovered subject to eligibility. As the finance company is the owner of the asset, you will not need to pay the purchase VAT at inception.

As with Hire Purchase, you can include a balloon rental to reduce the value of the primary rentals. At the end of the agreement you may have the option to enter into the secondary period. As you have generally covered the entire capital cost of the asset and hire charges (interest) in the primary period, should you wish to continue to use the asset, a secondary or peppercorn rental is charged. This rental typically approximates to 3% of the original cost and is a one off annual payment.

As you are not the owner of the asset, you cannot sell the asset during the rental period. However, as you are generally covering the total cost and hire charges within the primary period, you will be entitled to a share of the sale proceeds should the leasing company allow you to sell on their behalf. Your share of the sale proceeds is usually agreed at inception and is typically 95-99%

Operating Lease

The difference between an operating lease and a Finance Lease is that the primary period rentals do not cover substantially all of the capital cost and hire charges. For example a lease for a printing press costing £400,000 may include a residual value at the end of the primary period of £150,000. The primary rentals are thus based on £250,000 and not the capital cost of £400,000.

Due to the fact that the asset needs to be sold on at the end of the primary period to recover the residual value, it is very rare for an operating lease to have a secondary rental period. In some instances the funder may structure a finance lease for you to 'wash-out' the residual position.

With an Operating Lease you may source the supplier, but it is often the case that the leasing company can acquire the asset for you cheaper (for example car leasing companies). You will have to pay any documentation fee and an initial payment of a multiple of rentals. The rentals attract VAT that can be recovered subject to eligibility. As the finance company is the owner of the asset, you will not need to pay the purchase VAT at inception.