The Ins and Outs of Asset Finance

When starting a small business, you will need to acquire certain assets. With cash flow being one of the many challenges of new businesses, you will most probably be worried about affordability as once off payments for the purchase of expensive equipment are often not an option. In those cases, asset finance is a great solution and there are several options to choose from, depending on your business requirements.

Lease agreement or installment sale agreement
With asset finance such as lease agreements and installment sale agreements you can break down the payment of your assets in monthly chunks which enables you to invest in assets with minimal impact on your cash flow.

The lease agreement explained
When you enter into a lease agreement, you pay for the use of the asset. Asset leasing usually does not require you to pay a deposit which makes it an attractive option for business owners. Lease agreements can have different time frames, anywhere from a month to a couple of years. One of the advantages of leasing is that you can renew the contract after it ends and return the asset to the bank, or you may be offered to purchase your asset.

Another advantage of leasing is that you will always have access to the newest version of the asset which is great when you require machinery that needs regular updating in terms of features, or if you require a vehicle that you want to change every few years. As soon as the lease agreement comes to an end, you can enter into a new lease agreement and acquire the latest machinery that is available, enabling your company to offer your customers the best product or service. Lease agreements usually also include service or maintenance packages which can save your business significant amounts of money as the costs are usually fixed.

The installment sale agreement explained
Entering into an installment sale agreement means that you will be the owner of the asset as soon as your contract is fulfilled. installment sale agreements usually require a deposit of a certain percentage of the value of the asset. Installment sale agreements work in similar ways as lease agreements, you pay monthly. The difference is that at the end of your installment sale agreement, you own your asset. With installment sale agreements you need to keep in mind however, that the monthly repayments for your asset can cost you significantly, sometimes up to 25% in excess of the value of your asset. The advantage of obtaining assets via an installment sale agreement is that there is no need to apply for overdrafts or any kind of loan in order to be able to afford to pay for your asset. Security or collateral is also not required with installment sale agreements. Because you will own the asset after the contract is paid off, you can sell your asset at a later stage, although the value will have depreciated substantially during the duration of the agreement. Nevertheless you will have some return on your investment, which is not the case when you take out a lease agreement.

What is the best option for you
For more information on whether a lease agreement or installment sale agreement is right for you and your business, make an appointment with your relationship manager at your bank. He or she will be able to talk you through the different options so that you can make an informed decision.