:: Leasing and Asset Finance

Leasing and Asset Finance.

Sometimes called asset finance, leasing is a financing tool to fund assets on a short to medium term without affecting other funding you might have. Leases spread the cost over a length of time (usually two to five years), which helps you budget and match costs to revenue.

What is Leasing?

1. Leasing enables businesses to fund assets in a cost and tax- effective manner.
2. Leases are generally cheaper than other forms of loan finance and the tax benefits mean you can optimise your VAT and corporation tax position. Leasing also helps you manage the depreciation risk of your assets and your balance sheet profile.
3. There are different types of leasing, the principle differences being ownership: of the asset, cost and payment terms.

Common Characteristics to all leasing products

1. You pay a low initial payment
2. You can choose from various repayment periods
3. Leases help preserve working capital, and have cash flow and budgeting benefits
4. You may need to provide additional security
5. You can reclaim the interest paid

What are the different leasing products?

Finance leases

• In a finance lease you eventually own the asset.
• A finance lease is the most common form of leasing arrangement.
• At the end of the lease term, you: 1) Take ownership of the asset 2) Buy the asset for a small fee determined at the outset 3) Continue to lease it at a vastly-reduced 'peppercorn' rent
• Finance leases allow you to use the asset immediately with minimum outlay.

  Lease Rental

• You make monthly payments to rent the asset and take all the benefits of using it, but never own it.

  Hire purchase

• You pay monthly payments to purchase the item over a set term, after which it becomes yours. Some agreements will include service and maintenance contracts.

  Contract hire

• You pay monthly payments, which may or may not be fixed, to cover use of the asset over a set term plus the cost of maintenance and servicing.

  Operating leases

• In an operating lease, you do not purchase the asset but, rather, make payments to secure use of the equipment over a number of years. At the end of an operating lease term, you do not own the asset but have usually made lower periodic payments over the term. The provider will often provide service and maintenance contracts, and you can often upgrade the equipment over the course of the lease.

  How do I choose between leasing products?

• What type of finance suits my asset/equipment
• What are the main differences between the products?
• What general criteria matter to me?

General Terminology and Conditions Explained

Maintenance The cost of maintenance and the associated administration costs may or may not be built into the lease/rental payments.

Minimum period Most leases specify a minimum period of rental. At the end of this period you may have a number of options available to you.

Fixed period Some leases will be for a fixed period, often related to the useful lifespan of the asset (about 2 to 5 years). Depending upon the terms of the lease you may then decide either to keep or return the asset.

Initial payment Different providers and lease options will require you to put down differing initial payments. This may be important to you if cash is currently a constraint. Conversely, if you can pay a higher percentage of the asset initially, the provider may view the risk more favourably and reduce the interest rate on subsequent repayments.

Continuation options At the end of a lease term you may have 'continuation options'. These typically allow you the option of continuing the lease on the same asset for a much lower, or even nominal, 'peppercorn' rent.

Final Purchase Some lease products allow you to buy the asset at the end of the term of the lease at a price determined at the initial agreement.

Fixed and Variable Interest Rates The interest rate charged on the lease can be fixed or variable.

Corporate Tax A number of leasing products enable you to set payments against your profit before tax, thus reducing your overall tax liability. The eligibility of payments to be set against tax will vary according to your tax situation and the chosen product. Speak to your accountant for details, but generally: Finance Lease & Contract Hire - You can set all payments against profit before tax Lease Purchase and Contract Purchase - You can set interest payments against profit before tax.

VAT There are potential VAT advantages to leasing, and VAT is reclaimable under certain circumstances. Again, you should confirm your specific situation with your accountant, but in the majority of cases:

• Lease Purchase - You can reclaim VAT on the cost of the asset
• Finance Lease - You can reclaim VAT on your payments
• Contract Purchase - Unlikely to be VAT reclaim
• Contract Hire - You can reclaim VAT on your payments

Writing Down Allowances/Depreciation If you cannot use all of the tax advantages of depreciating an asset that you have purchased, the financial provider may be able to use these by depreciating the asset on their balance sheet, and passing the advantage on to you in the form of lower payments. You are usually eligible for writing down allowances in contract purchase and hire purchase.

Balance Sheet Balance sheet advantages are usually relatively small in finance leases as the asset is usually regarded as a liability in full, and will be 'on balance sheet', with the exception of contract hire, which is treated similarly to an operating lease. An operating lease may enable you to treat the asset as 'off balance sheet'.