A quick guide to equipment finance

SHOULD I use a lease or hire purchase? This is one of the most common questions asked of business bankers and finance brokers.

While there is never a simple answer, the following guide provides a quick introduction to the features and benefits of different equipment finance options.

p Finance lease

A finance lease allows a business to get the equipment it needs, without tying up a large amount of capital. The financier buys the equipment and ‘rents’ it back to the business. At the end of the lease contract the business can refinance, pay out the contract or offer to buy the equipment.

There is usually a residual value, corresponding to the expected market value of the asset, which is owed to the financier at the end of the lease.

Normally the lease payments can be claimed as a tax deduction.

p Operating lease

With an operating lease, the financier retains ownership of the equipment while the business makes regular rental payments. Normally there is no residual value and the equipment is automatically returned at the end of the term.

The main advantage is that the equipment can be upgraded at any time, therefore this option is particularly suitable for computer equipment.

The rental payments are normally treated as deductible expenses.

p Hire purchase

Hire purchase is similar to a lease, except that the business automatically purchases the equipment upon completion of the contract.

The business can pay a deposit up-front, in contrast to leases, which must be 100 per cent financed. The contract can provide for a balloon or residual payment at the end, to suit the cash flow needs of the business.

The borrower has an option to purchase the equipment outright at any time during the term of the agreement.

Both depreciation and interest charges are normally treated as deductible expenses.

p Chattel mortgage

With a chattel mortgage, the business purchases the goods direct from the supplier and the financier takes a charge over the goods. The cash flow for the business is similar to hire purchase, with agreed payments for the term of the lease. Similarly, the business may be able to claim both depreciation and interest as tax deductions.

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