What is Asset Financing?

If your business requires capital equipment such as machinery, plant, vehicles, equipment, or other identifiable assets then asset financing is a practical solution. Asset financing is a loan agreement from a financial provider that is secured in some way against the asset itself. The finance provider who supplies the funding facility to your business will maintain a financial interest or ‘lien’ over your asset until the loan is repaid.

The cost of the asset is broken down into a number of payments over one or more years within the expected lifespan of the asset. This assists the finances of the business as there is no major capital expenditure by the business at the time that the asset is purchased. There are different methods to finance the purchase including lease purchase and hire purchase, which are essentially the same in that the customer eventually owns the asset but with different payment profiles, and finance lease and option lease, where the lessor does not take ownership of the asset at the end of the term of the agreement.

Where asset financing takes place using the hire purchase and lease purchase approaches the funder uses the asset as the security and after full repayment has taken place then transfers ownership of the asset to the customer.

Where asset financing takes place using a finance lease the customer can continue to paying rental for the asset after the primary term has been completed and upon sale of the asset to a third party, will receive 85% to 95% of the sale amount with the balance being retained by the finance provider.

In the case of an option lease when the term of the agreement has been completed, the asset is returned to the finance provider and there is no secondary period available.

When selecting a method of asset financing the decision about which method is to be used generally takes into account the type of asset being purchased and the taxation treatment that is relevant.
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