Important Points
Key considerations when entering an asset finance agreement.
Asset finance is a powerful tool for business growth, but entering into any financial agreement requires careful consideration. The points below highlight the key areas you should understand before committing to an asset finance facility.
Key Points to Consider
Understand the Product Differences
Hire purchase, finance lease, operating lease, and contract hire are fundamentally different products with different ownership, tax, and balance sheet implications. Choosing the wrong product can result in unexpected costs and missed tax benefits. Always take professional advice before committing.
Read the Agreement Carefully
Asset finance agreements are legally binding contracts. Pay particular attention to the term, total amount payable, early termination provisions, excess usage charges, and end-of-lease obligations. Ensure you understand all fees, including arrangement fees, documentation fees, and option-to-purchase fees.
Assess the True Total Cost
Compare the total cost of the finance agreement — including all interest, fees, and charges — against the cost of purchasing the asset outright. Factor in the time value of money and the opportunity cost of deploying cash elsewhere in the business.
Consider the Asset's Useful Life
The term of the finance agreement should align with the expected useful life of the asset. Financing a 3-year-life technology asset over 7 years, or a 10-year-life machine over 2 years, creates a mismatch that affects value and cash flow.
Insurance Requirements
Most asset finance agreements require you to maintain comprehensive insurance on the asset for the duration of the agreement. The finance company is typically named as an interested party on the policy. Failure to maintain adequate insurance constitutes a breach of the agreement.
VAT Implications
The VAT treatment differs by product type. On hire purchase, VAT is typically payable on the full purchase price at the outset (recoverable if VAT-registered). On leasing, VAT is charged on each rental payment. Understanding the VAT implications is important for cash flow planning.
End-of-Agreement Options
Different products offer different options at the end of the term. Hire purchase transfers ownership automatically. Finance leases may offer a secondary rental period or sale to a third party. Operating leases require return of the asset. Understand your options before signing.
Personal Guarantee Implications
If you provide a personal guarantee, you are personally liable for the outstanding balance if the business defaults. Ensure you understand the extent of your personal exposure and consider whether this is acceptable given your personal financial position.
Cooling-Off Periods
Consumer credit agreements (where applicable) may include a statutory cooling-off period. Business-to-business agreements typically do not have a statutory right of cancellation once signed. Ensure you are committed before signing any documentation.
Credit Implications
Asset finance agreements are recorded on your credit file and the credit files of any guarantors. Payment history — both positive and negative — is reported to credit reference agencies. Maintaining timely payments protects your credit standing for future borrowing.
Important Notice: This information is for general guidance only and does not constitute legal or financial advice. Aberdeen Corporate Finance Limited is not regulated by the FCA.
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