We primarily offer three ways to finance a new or used piece of equipment although there can be variations to suit individual circumstances. These three alternatives are hire purchase, finance lease and contract hire and are detailed below.
This can also be referred to as lease purchase and allows you to pay off the full amount of the agreed purchase price over a defined time period. At the end of that period, provided you stick to the terms of the agreement, you will own the asset.
There is also the benefit under a hire purchase agreement, of a capital allowance on the reducing balance. Also, if your business is registered for VAT, then the full VAT amount can be claimed back at the time of purchase – in a private members golf club the actual amount reclaimable can vary. In other circumstances, any interest that you pay may be offset against profits.
Some businesses may want to have the use of, but not necessarily own a piece of equipment. For instance, if cash flow may be an issue then it may be more desirable to reduce the repayment amount by allowing the bank or finance company to take advantage of those capital allowances and pass on the benefit through lower rentals.
Also, many start-up businesses that have yet to turn in any significant profit may not be able to make best use of capital allowances, so could instead consider leasing the equipment.
Although a finance lease will look and feel the same as a hire purchase, you will not end up owning the asset at the end of the contract. Ownership remains with the finance company at all times.
The agreement is structured so that you pay off the whole value of the asset. If you are leasing a greensmower worth £20,000, you will pay the whole £20,000 plus interest during the lease. If you are still using the asset at the end of the original contract, a secondary agreement can be entered. This secondary agreement will be for a nominal fee.
You may also be able to offset rental charges against profits and you are able to claim VAT as well. The agreements can be structured in different ways but you may find that you can choose when to sell the asset and, if so, get a rebate for the remaining rental charges.
This offers you an opportunity to have the use of a piece of equipment, often tied in with a maintenance contract, for the duration of the agreement. Ownership remains with the finance company and you will pay a set fee over a period to use that equipment. The contract will outline a residual value at which the finance company will take back the equipment at the end of the contract.
You could find this cheaper than a finance lease. If, for example, you wanted to buy a greensmower for £20,000, a finance lease would be structured to pay off the whole amount plus interest over a period of, say, 5 years.
Under contract hire however, the contract will specify a residual value that the goods will be worth at the end of the lease. Using our example of a £20,000 greensmower, the contract may specify a residual value of £4,500 at the end of a five year lease. You will pay a total of £15,500 plus interest for the use of the greensmower during that time.
For this reason, maintenance can also be tied in to the contract to ensure that the asset will have the required residual value. This can be constructed in various ways, but generally covers a planned maintenance package which can be enhanced with breakdown cover at an additional cost.
One of the big benefits of contract hire to a small business is that there is no large capital outlay for equipment that could damage the company’s balance sheet. While your business needs certain equipment, through a contract hire agreement only the rental charges will be shown on the balance sheet which should make it more attractive.