Your options when it comes to buying new assets

17/03/2022

Having access to the right equipment and machinery in order to deliver quality products and services to customers is vital to many businesses.

Yet, when it comes to buying assets, there are many things to consider, particularly with regards to finance and your cash flow.

Here we explore some of your options when it comes to buying new assets to help you decide which option is best for your business.

Buying assets outright

Some companies prefer to purchase assets like plant and machinery, IT equipment and vehicles using their own money, as there is a certain reassurance and benefit in owning assets outright – with no cost of borrowing to consider. Yet doing so may not be possible without sufficient cash reserves.

Benefits

You own the asset outright
You are treated as the owner for tax purposes and can claim capital allowances
Avoid tying your business into long-term finance agreements
You avoid paying interest payments on any borrowing

Disadvantages

Paying the full cost of the asset up front can affect your cash flow
You can’t easily spread the cost to coincide with money coming into the business
You are entirely responsible for the maintenance and repair of the asset
The value of the asset could depreciate over time and be worth less than you paid for it

Hire purchase

Hire purchase allows businesses to hire an asset over a fixed period of time in return for regular payments. Once the repayment period of the hire contract is completed, full ownership of the asset is transferred to the business.

Advantages

Avoids the cash flow implications of buying new assets in one lump sum
Your business may be able to afford assets of a higher specification
The interest that’s applicable is typically lower than the interest accompanying an overdraft or bank loan
Monthly repayments spread over a fixed term allow for accurate cash flow forecasting
It is possible to claim capital allowances against tax on commencement of the hire purchase agreement
You’ll own the asset at the end of the agreement
Option to pay off the loan early
There are fewer restrictions (such as mileage or conditional restrictions associated with leasing)

Disadvantages

The asset can be repossessed if you don’t keep up with payments
It will cost more overall than buying outright
You may have to put down a deposit or make some payments in advance
Monthly payments are based on credit rating
Late payments could affect your credit score
You won’t own the asset until the final payment is made

Learn more about hire purchase

Leasing

Leasing is where an asset finance company purchases the required asset on the business’s behalf before leasing it back for a fixed period in return for monthly payments.

Advantages

Avoid the cash flow complications of purchasing assets outright
Your business may be able to afford assets of a higher specification
Use the equipment only while you need it, and avoid asset depreciation
Benefit from fixed monthly repayments to make cash flow management simpler
Deduct the cost from taxable income as a trading expense
Minimal upfront costs to obtain new assets
Gain additional finance that may not affect other banking arrangements
The leasing company carries the risks if the equipment breaks down

Disadvantages

You can’t claim capital allowances on the leased assets if the lease period is for less than five years (and in some cases less than seven years)
You may have to put down a deposit or make some payments in advance
It will cost more overall than buying outright
Your company normally has to be VAT-registered to take out a leasing agreement
When you lease an asset, you don’t own it, although you may be allowed to buy it at the end of the agreement

Learn more about leasing

Business loans

Some businesses who like the security of owning assets outright but don’t have the necessary funds to purchase the asset themselves choose to get a business loan to cover the cost.

Advantages

Your business may be able to afford assets of a higher specification
Monthly repayments spread over a fixed term allow for accurate cash flow forecasting
Widely available and it’s easy to apply
Can be used for a range of purposes, not just buying assets
You are treated as the owner for tax purposes and can claim capital allowances

Disadvantages

You may need to use other assets as collateral or security against the loan
Interest rates are typically higher than through hire purchase or leasing
They can be harder to access for those with limited trading history or poor credit rating
You are entirely responsible for the maintenance and repair of the asset
The value of the asset could depreciate over time and be worth less than you paid for it

Learn more about business loans

Which asset finance option is best for your business?

With so many finance products and providers available, it can be hard to know which option is best for your business when it comes to buying a new asset.

As an FCA-authorised and award winning commercial finance broker, we’ll use our extensive experience and market insight to quickly and effectively identify the most suitable options and lenders to meet your needs.