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How Asset Financing Works

What is Asset Finance and How Does it Work?

Many businesses use asset financing to borrow money for a variety of important items or payments. Asset finance solutions are often used to buy or rent equipment or materials, but can also be used to pay wages or grow the business in some other way.

There are different kinds of asset financing available, as explained below. Most will involve the finance provider paying for an asset that the finance receiver then rents according to different terms. Some asset finance deals also allow businesses to offer assets they already own as collateral for a loan.

Types of asset finance solutions

The different types of asset financing options available can help a business invest in what they need to grow, even if the business has bad credit. Criteria can vary for each type, which can have advantages or disadvantages depending on the circumstances. Here are the main asset finance solutions.

Hire purchase 

Also known as a lease purchase, this kind of asset financing sees the finance provider retain ownership of the asset that is being leased until the end of the terms. The receiver of the finance pays agreed-upon fixed payments over the course of the contract. They then have the option to buy and take ownership of the asset with the final payment.

Finance lease

Also known as a capital lease, a finance lease means the receiver of the finance only ever rents the asset from the provider. The payments will be similarly arranged, as with a hire purchase, but the provider will retain ownership of the asset and the receiver will not have the option to own it at the end of the agreed-upon terms. Reduced payment terms are usually an advantage finance leases have over hire purchases, plus the rental payments can often be offset against profits for beneficial tax purposes.

Equipment lease

As with a finance lease, equipment leasing again involves the finance provider buying an asset to be rented by the finance receiver, with the asset in this case specifically being equipment. Payments are made over an agreed period, with the finance receiver having a variety of options at the end of the terms. They can extend the lease for the existing asset if they choose, or upgrade it to continue renting. There will often be an option to buy the asset outright as the provider would be looking to sell the asset anyway if the lease was not being extended. 

This type of asset financing can be very beneficial in certain circumstances. This is because the service and maintenance costs for the equipment are the responsibility of the finance provider, which is not the case with a hire purchase agreement. An equipment lease also counts as an operating cost and thus can be offset against profits for tax purposes.

Operating lease

An operating lease is usually a cheaper option than an equipment lease as the asset is only required for a limited time. Such asset financing is often used for specialist or temporary equipment that will not be required for the entirety of the equipment’s lifespan. It is a less expensive option to equipment leasing as the payments are calculated according to the limited lease time.

We can help

If you’re interested in finding out more about asset financing, or any other aspect of your business and its finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments to keep your business asset finance on track.

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