Hond Financial

Posts Tagged ‘asset leasing’

For some businesses experiencing difficulty, they find themselves with all their capital tied up in large and costly assets. Whilst their competitors may be envious of their asset ownership, since they themselves are required to pay to use the asset in question, these struggling businesses are usually unable to continue trading without a large influx of funding.

When this position is reached, it may be found that to liquidate assets is unacceptable considering a poor secondary market, and also the fact that the practical utility of the assets remain high. In this situation, the resale price of the asset fails to reflect its true value, and so cash from other sources are sought after.

In these circumstances, the asset can clearly be seen to be well integrated into the business and therefore is suited to the running of the company.

Further, the business needs to prioritize the use of the asset over its ownership, and seek to make good use of the equity it holds in these assets. In this sense, for a lender to accept and place an asset as collateral for an injection of funds in the form of a loan, they would be required to structure any finance agreement around an assets profitability; it would simply not make good business sense to lend funds to an ailing business that is unable to be fully secured. It is crucial to ensure that there is sufficient cover in place in order to protect both the company and its employees; many companies are becoming increasingly aware of the benefits of business life insurance for shareholders, key people or employees.

In order to avoid these issues, cooperative providers of facilities to sell and lease back purchase the asset at a reasonable market value, therefore providing the business with the urgently required funds. The structure of the transaction will take into consideration the depreciation of the specific asset, however it will provide the sought after conditional security of funds required by the lender.

From that point a lease is executed where the business leases the asset back on terms congruent with its cash flow projections.

This arrangement can be seen to benefit both the lender and the borrower as both business needs are met: the borrower is able to continue using familiar and trusted assets in production whilst the lender obtains a profitable financial transaction that is secured in order to meet their own policies.

For the once-faltering business, they have a new lease of life, and the ability to ply their trade.

The accountants will simply view their balance sheet as depicting a transfer of assets from a fixed asset account to cash in the bank account. Being on the same side of the balance sheet, if the assets have been correctly depreciated, the transaction ought to leave the balance sheet unaffected. As a lease is now in place, the financial obligations running with such an agreement remain outside the balance sheet, but for the lease repayments being recorded as expenses or costs of sale. For any further information on life insurance or alternative methods of protecting your business, please click here.

As one of the UK’s most popular kinds of asset finance, leasing an asset allows the business the ability to efficiently budget for the cost of the asset in question by committing themselves to a predetermined set of payments of rental.

In recent times technological assets such as computer and telecommunications systems have been found appropriate to this type of finance, but there is no obligation to strictly apply lease rents to any particular asset type. What is advisable, however, is that an awareness of finance and how possible future events may affect the health of your finance and agreement is demonstrated: this website may be able to provide further information.

The advantages of this type of finance are plentiful. The business is able to claim the rents paid on their taxable income, however a large capital expense is not necessarily needed to be endured since the business relinquishes ownership of the asset. While the advantages of claiming a proportion of the asset’s principal value have now been legislated out of existence by the Finance Act 2006 UK, depending on the type of asset any applicable VAT is able to be claimed by the lessee and this effectively reduces the cost of the rents.

If the business has a sound cash flow, and particularly if the asset itself is to generate additional income, the rents are justified by acquisition of the asset itself.

While a lease rental finance option is available on new and used assets, at commensurate cost, the rents paid each month cover both the purchase price of the asset and also the cost of funding it.

Due to this arrangement and, bearing in mind the asset’s depreciation over time, the lessee will receive an additional advantage at the end of the lease when the proceeds from the asset’s sale will be refunded. Naturally, these kinds of arrangements are engineered to provide a profit to the financier and as such there will ultimately be a cost associated with the process, however this release of equity in the asset may represent timely cash flow to the lessee.

Often this type of financial agreement is provided for periods of between 2 years and 7 years, however at the end of the contract, the lessee will have the option of extending the lease at a mere nominal rent if that is more suitable. This may be convenient for reasons to do with financial reporting, as particularly at financial year end, it may not be desirable to receive a sudden boost to cash reserves. Consequently, the lessor retains ownership of the asset and as such, has collateral for their capital expense. Given this security, when initial negotiations take place, a lessor will normally permit the lessee to suggest the amount of payable rents that is most convenient to their cash flow projections.

This type of asset finance is heavily used with respect to vehicles, but is equally appropriate to other assets such as equipment and machinery. It is important to consider that when there is either no or an illiquid secondary market for the asset, the benefit of receiving a refund on rents paid may be jeopardized. For any further information on how the current health of your finances may affect you application for asset finance, please click here.