Asset financing is a way to receive funds by using assets of the company. This type of funding is generally common among start-ups and large companies. Assets hold intrinsic value. For a logistics company, a fleet of trucks are the assets. Accounts receivables, inventory, machinery and buildings are the types of assets you can use against borrowing.
A lender will assess the value of your assets to determine the amount of loan and those assets will work as collateral. If you fail to repay the loan, the lender will dispose of those assets to get the money back.
One of the essential reasons for asset financing is to invest in equipment. For instance, you want to purchase equipment. You may avoid paying for the equipment outright because you may have a cash shortfall. It can be challenging to pay for rent, staff, inventory, and the like.
Another crucial reason to opt for asset financing is to raise cash flows quickly. It is not uncommon for companies to face cash shortfalls due to one idea and the other. You may need to invest in inventory because of a sudden increase in the demand or you may be having difficulty meeting all regular expenses.
There are various types of asset financing, such as hire purchase, operating lease, financial lease, and technology rentals. This blog will discuss only two types of funding – hire purchase and finance leasing.
What is a hire purchase?
Hire purchase is an agreement that allows the possession of an asset with a hire purchaser. Under this agreement, the hire purchaser will pay the total amount of loan in instalments over a specified period. The instalment includes the principal amount of the asset and the interest. The hirer will have the possession of the asset but cannot get the title unless the last instalment is paid. However, the hire purchaser can terminate the agreement anytime before the transfer of ownership.
What is a financial lease?
Financial leasing is an agreement that allows the lessee to utilise assets of the lessor. Under the agreement, the lessee will make periodic payment. Such payments are known as lease rentals. Note that the ownership of the asset will remain with the lessor. However, the lessee will enjoy the benefits.
Other things to know
Now that you have come to know the fundamental difference between hire purchase and finance lease, but there are a lot to explore.
- Ownership transfer
Under hire purchase agreements, the ownership is transferred to the hirer only after the settlement of the final instalment. However, the financial lease allows for the possibility of ownership only when the lease period ends. However, the lessee has the option to own the asset by paying down the amount required for obtaining the ownership.
- Tax benefits
Depreciation can give you benefits in the form of income tax reduction. In finance leasing, the lessor derives the depreciation benefits, but such benefits are available to hire purchaser under the hire purchase agreement.
- Length of the agreement
There is no exact length because it depends on the amount borrowed against the value of the asset, but the term of finance leasing is generally longer than hire purchase. Finance leasing applies to buildings and properties while hire purchase is commonly used for financing cars, equipment, trucks, Lorries, and the like.
- Down payment
A down payment is obligatory in case of hire purchase and the rest of the amount you will pay back in fixed monthly instalments. Finance leasing does not require any down payments. A lessee has to pay the cost for utilising the asset.
- Payment defaults
Under hire purchase, the owner will seize the possession of the asset in case of any defaults. However, the finance lease agreement can be terminated at any time. The asset will be sold at a particular value to the lessee.
- Repairs and maintenance
The hirer is supposed to incur maintenance expenses under the hire purchase agreement. However, this responsibility lies with the lessee in the finance lease agreement.
Well, whatever the asset financing option you choose, you should carefully analyse the pros and cons. If you are not able to make any decision, you should take out easycheaploans.uk . They do not cost as much as asset financing.