Equipment finance involves borrowing against a tangible asset other than property, such as a van or a machine tool. Equipment finance can be provided at the time the asset is purchased, or subsequently in order to raise finance against assets you already own.
Equipment finance comes in two forms, hire purchase and finance leasing.
Hire purchase is a simple way to purchase an asset and spread the cost over time. You pay in instalments, which means the item appears on your balance sheet, and because you own the asset you'll be responsible for maintenance and insurance costs — but you'll also have full ownership of the item after the term ends. The lender retains security over the asset, in the event of default, will take possession of the asset.
With finance leasing, the lender buys the asset you need, and rents it to you on a lease. That means you have it straight away, and only need a fraction of the total amount up front. Generally, you have to pay the first month’s rent, spreading the VAT over the whole period. At the end of the lease, you can either continue leasing the item, buy it outright at an agreed price (factoring in money already spent), upgrade to a new piece of equipment on a new lease, or simply return it.
Many businesses find leasing a good arrangement because as well as spreading the cost over time, you can adapt to your company’s situation. For example, say a delivery company leases a van, and at the end of the term business is booming — they could get a larger vehicle on a new lease, or a package deal for multiple vehicles.