Leasing and Asset Finance Paying cash for an asset can be a significant drain on your working capital whereas leasing gives you access to the asset without paying for it all at once. All forms of leasing are basically rental agreements that give you (the lessee) the right to use an asset owned by the lessor (finance company) for a specific period of time in return for regular payments (rental payments). You can lease almost anything, from equipment valued at a few thousand pounds to assets worth millions. Leasing contracts are flexible and can be tailored to your needs. When leasing, consider its effects on accounting, reporting, tax, and your cash flow. There are many types of leasing but, fundamentally, all fit one of two categories: • Direct Lease - you identify the asset (and negotiate the price) and arrange for the leasing company to buy it from the manufacturer (if new) or the previous owner (if used) to rent to you • Sale-and-leaseback (also called purchase leaseback) - you sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back.

In each case, the lessor owns the asset, not you, and rents it to you. You must return the asset at the end of the lease to the lessor, although some leases grant you an end-of-lease option to renew the lease at a minimal cost (secondary period) or to sell the asset to a third party as agent of the lessor.

Types of Asset Finance
There are three major types of leasing: finance leasing, operating leasing and contract hire. Although strictly speaking not a type of leasing, hire purchase is also included in the following:

• Finance Leasing (Full Payout Lease). You effectively enjoy all financial benefits and risks without actually acquiring legal title. At the end of the lease, the asset is sold to a third party and you can receive a share of the sale proceeds (if the lease is not being extended). Generally, you will not be able to become the owner of the asset at any time - unless a private arrangement is made with the third party. However, you usually have the option to extend your lease and as you will have paid for almost the full value during your initial lease period, the rental payments for subsequent periods will be minimal (sometimes referred to as "peppercorn rental").

• Operating Lease. Often with a shorter time frame than financial leasing (always significantly shorter than the working life of the asset), operating leasing is more like a regular rental. The lessor expects to be able to either sell the asset in the second-hand market or to lease it again and will therefore not need to recover the total asset value through lease payments. There may be an option to extend the leasing period at the end (this negotiation can only take place at the end of the initial rental period). As with finance leases, you will not be able to become owner of the asset at any time but, contrary to financial leases, you will not share in the sale proceeds.

• Contract Hire. A form of operating lease (often used with cars and other vehicles) that includes a number of additional services such as maintenance, management or replacement if asset is in repair.

• Hire Purchase. This is an agreement for the hiring of an asset with an option to purchase. The legal title will pass to you when all payments have been made. The term of a hire purchase must be significantly shorter than the working life of the asset. You are able to claim capital allowances as if you had purchased the asset outright, gaining immediate use of it. Hire Purchase agreements are typically written for domestic users, not so much for business users.

Choosing the Right Type of Finance
All types of financing offer different advantages and it is important that you assess your circumstances and needs before committing to a specific finance contract. For example, if you
• want to own the asset straight away, an outright purchase (cash or loan/overdraft) might be appropriate;
• may want to own the asset at some point in time and want to take advantage of instalment payments, hire purchase might be the best option;
• do not want to own the asset at all but require it for most of its useful life, consider a financial lease; and
• require the asset for a period of time significantly shorter than the useful life of it, consider an operating lease.

Advantages

• Better Cash Flow. Leasing gives you access to the asset with minimal up-front payments and spreads the cost over time. You to pay for the asset with the income it generates while minimising the drain on your working capital
• No debt. An operating lease preserves your credit options and does not influence your credit limit as it is generally not classified as debt but as expense (note that this advantage does not apply to finance leases!)
• Maximise Financial Leverage. Your lease can often finance everything related to the purchase and installation of the asset and may free up cash flow to pay for items such as training
• Simplified cash flow management. Lease payments are usually flat, making cash management more predictable and easier than with a variable rate loan. The fixed interest rate of a lease also helps if interest rates rise
• Tax advantage. Operating lease payments are generally tax deductible just like depreciation charges but are made with pre-tax money. Cash purchases, in contrast, are made with after-tax money. Hire purchase agreements allow the lessee to claim capital allowances
• Flexible time frames. Leasing contracts can be structured to fit your requirements. Use an asset as long as you need it without owning it forever
• Hedge against obsolescence. Depending on your end-of-lease option, just return the asset to the lessor. You will not have the hassle of selling the used asset or run the risks related to residual value and (technical) obsolescence
• Additional advantages. Some leases offer additional advantages such as cancellation options or asset maintenance

Disadvantages

• More expensive. A finance lease is usually more expensive than an outright cash purchase as the payments include finance charges. However, leasing may cost less than other forms of financing. Also consider the tax advantages when making this calculation
• Additional Guarantees. Depending on the credit rating of your company, the lessor might require additional guarantees. These may be provided by you, your partners or your bank and could affect your personal credit rating or your standing with your bank
• Fixed Term. It may be impossible, or at least costly, to terminate a leasing contract early
• Fixed Interest Rates. Interest rates are usually fixed throughout the lease which may prove a disadvantage in times of falling interest rates

The Financial Service Authority does not regulate most forms of business finance

Written quotations are available on request. All loans are subject to status. A valuation or survey fee may be required. An administration fee may be payable.