There are a number of lenders that provide loans for business assets and they do this in a variety of different ways! However, there are some restrictions on the types of assets (equipment or machinery) that they will finance.
There are three basic ways formal asset financiers structure their loans:
In this option, the business buys the asset with a prime-linked loan from the lender. You then pay this back in equal instalments, over a 60-month period (plus interest of course). Sometimes the period can vary from 12 months to 10 years; This depends on the life of the asset. While you’re paying off the loan, the lender owns the asset, in the event that you can’t pay back the loan and they need to sell the asset to recover their money.
You can’t sell the asset without the lender’s consent. Once you’ve paid back the loan to the lender, the ownership of the asset reverts back to you.
Here are the basics for this option:
This is also known as an “operating lease” and is similar to a lease agreement. However, once the contract comes to an end, the business won’t have the choice to buy the asset. The asset is returned to the lender, who can rent it to someone else.
With rental agreements, the monthly payment is usually slightly lower than that of a lease agreement, or an instalment sale. A rental agreement can include a full maintenance service, which means the lender is responsible for the repairs and maintenance of the asset. In this case, the monthly payments will be higher.
As you gathered from reading this module, a lease agreement appears a lot like an instalment sale agreement in disguise, with the exception that you do not have to purchase the asset at the end of the lease. A rental agreement isn’t as similar because it is, and never will, be your asset; Someone else (the lender) owns the asset and you are merely renting it. Also the full cost of the rental is deductible as a business expenses and therefore there can be tax benefits.
If you are short on cash-flow, a rental agreement may be tempting because the monthly payment is usually slightly lower than the other two options. The only catch is that this may be a great option in the short-term, but can become costly in the medium to long-term. You continue to make payments, but you are not building up to eventually owning the asset.
The type of agreement you go for also depends on:
For example, with a computer, technology changes so rapidly that it can become worthless quite quickly. So perhaps in this instance, consider a rental agreement. Whereas an industrial tool such as a combine harvester has a longer life span of 40 to 50 years. In this case, it makes more sense to buy one.
There are different ways to finance the purchase of equipment or machinery other than asset finance options. These are discussed in the module Do you need finance for equipment and machinery?
Finfind provides its services free of charge to businesses seeking finance. Our primary purpose is to link SMEs with all the relevant finance providers and finance products that match their funding needs. As a matching service we are not required to be a registered finance provider as we do not loan money directly.