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Benefits of Asset Finance for SMEs

Small and medium-sized enterprises (SMEs) are constantly looking for ways to scale, adapt, and grow, all while managing budgets and maintaining operational efficiency. Asset finance offers a structured way for businesses to acquire essential assets like equipment, vehicles, and machinery without large upfront costs. By leveraging asset finance options, such as hire purchase and leasing agreements, SMEs can preserve cash flow, potentially benefit from tax advantages, and tailor payment schedules to fit their unique needs.

This article outlines the top benefits of asset finance for SMEs, focusing on how these options can support growth and streamline operations for smaller to medium sized businesses.

Benefits of a hire purchase agreement

A hire purchase agreement provides immediate access to business assets without the need for a large initial capital outlay. This structure allows businesses to purchase assets over time, giving them use during the term and, eventually, ownership. Here are the primary advantages of hire purchase agreements for SMEs:

Immediate use of business assets without capital outlay

  • Hire purchase agreements allow SMEs to start using assets straight away, without requiring significant initial capital. This is particularly valuable for businesses wishing to retain capital, as they can access essential tools and equipment immediately, supporting seamless business operations and avoiding any delays that might impact productivity.

 

Fixed cost and flexible payment profiles

  • Fixed Rate Hire purchase agreements come with fixed monthly payments, which provide SMEs with predictability and the ability to manage their budgets more effectively. Some agreements offer the option to customise payment terms to match cash flow cycles, which is especially useful for businesses with seasonal revenue fluctuations.

 

Option to purchase at the end of the term

  • At the end of the hire purchase term, businesses have the option to purchase the asset outright for a small fee (known as the Option to Purchase fee). This ensures continuity and long-term control of assets that have become integral to operations, without requiring additional financing. For SMEs, this flexibility makes hire purchase a valuable tool for securing essential business assets.

 

Unlimited use of the asset during the agreement term

  • A hire purchase agreement allows for unrestricted use of the asset throughout the term, enabling SMEs to integrate it fully into their operations without limitations. This unlimited access supports optimal utilisation, allowing companies to make the most out of their investment from day one.

 

VAT payment options

  • VAT on a hire purchase agreement is typically payable upfront on the asset’s full cost, which can offer some financial benefits for SMEs. In many cases, businesses can reclaim VAT on the purchase, reducing the effective cost of the asset. Additionally, hire purchase agreements provide flexibility in VAT payments, which can be particularly beneficial for SMEs aiming to provide smaller deposits.

 

Potential tax benefits such as writing down allowances

  • Hire purchase agreements often come with tax advantages, including writing down allowances. This allows businesses to offset part of the asset’s cost against taxable profits, lowering their tax burden. These tax benefits improve the overall financial feasibility of the investment, making hire purchase an appealing option for growth-focused SMEs.

Benefits of a lease agreement

Leasing agreements offer an alternative approach to asset acquisition, allowing SMEs to use assets without committing to long-term ownership - essentially renting or hiring. This setup offers flexibility, low initial costs, and options at the end of the lease term, making it a versatile option for many businesses.

Low initial capital outlay and fixed rental payments

  • Leasing agreements enable SMEs to access assets with minimal initial capital investment, which conserves cash flow and reduces financial risk. Leasing arrangements also come with fixed rental payments, allowing businesses to budget accurately and maintain predictable expenses over the lease term.

 

VAT is payable on each rental payment as it falls due

  • Unlike hire purchase, where VAT is typically paid upfront, leasing agreements spread VAT payments across each rental period. This approach is particularly advantageous for businesses that prefer to manage VAT liabilities incrementally, aligning with regular cash flow rather than a one-time lump sum.

 

Options available at the end of the primary period

  • Leasing agreements offer a range of options at the end of the primary lease term, providing SMEs with flexibility in managing their assets according to their evolving needs:

Return the asset

    • At the end of the lease, businesses have the option to return the asset if it no longer serves their needs. This flexibility is ideal for companies that frequently update equipment or need specific assets only temporarily.

Introduction to an unconnected third party for sale at fair market value with a retention of a percentage of the sales proceeds

    • Some funders leasing agreements allow SMEs to introduce an unconnected third party to purchase the asset at a fair market value. In these cases, the business may retain a portion of the sales proceeds, providing an opportunity to recover some of the investment made through the lease.

Continue to lease the asset by paying annual secondary rentals

    • If the asset remains useful, businesses can choose to extend the lease by paying secondary rentals, often at a reduced rate. This option allows SMEs to keep assets in operation without the need for a new agreement, maintaining continuity while offering a cost-effective alternative to asset replacement.

In summary, asset finance offers SMEs a flexible, tax-efficient, and cash-preserving way to acquire essential business assets. Whether through hire purchase or leasing, these agreements empower smaller businesses to focus on growth and operational success without the heavy financial burden of upfront capital. For SMEs looking to expand their capabilities and maximise financial resources, asset finance presents an adaptable and strategic solution to support long-term success.

Novuna and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.