Options for Asset Purchasing
Although gaining finance for a new business is often about obtaining a loan or raising equity, it is also possible to finance individual assets separately in a way that is efficient from both a practical and a financial perspective.
When a business relies on certain assets as part of its operation, such as machinery or transport, it may actually be possible to enter into individual agreements for the provision of these items. Typical agreements might include hire purchase, leasing or individually negotiated contracts.
From an accounting point of view, an asset, once it has been purchased is entered as an asset and then, if appropriate (as is normally the case with machinery and vehicles) it is depreciated over the expected life of the asset. For example, if a car is worth £5,000 at the time of purchase and is expected to have a useful life of five years then, after one year, it will be entered on the balance sheet as being worth £3,000. The £2,000 is then seen as a cost against that year's profits.
Therefore, it is not always seen as a positive thing to have a large amount of depreciating assets on a company balance sheets. With this in mind, other options such as hire purchase or leasing should be considered.
Hire purchase is something that is reasonably familiar as it is used in the consumer market, often in relation to car purchase. A hire purchase agreement is simply a hire or loan agreement that builds a purchase element into the monthly costs. This means that, at the end of the hire period, the asset belongs to the company that has previously been hiring the asset.
Most businesses do not see hire purchase as a particularly favourable option, mainly as they find themselves in the position of owning an asset at the end of the period that is largely worthless. Of course, it depends on the terms of the hire purchase as to just how favourable this option actually is. The interest element of the payments is tax deductible which can help with immediate cash flow. However, the value of the asset at the end of the term may mean that the short-term benefits will simply not make this a viable option.
Leasing is generally seen as the most favourable way of financing an investment. This because it offers the advantages of the payments being tax deductible whilst there is no requirement to own the asset, at the end of the term, allowing the company to lease a newer model or different item in line with their growing business needs.
- In addition to securing general financing, it is often worth considering the financing of individual assets
- The two main ways of achieving this type of financing is through hire purchase or through leasing
- Both of these methods mean that the company does not have a depreciating asset sitting on its balance sheet
- The regular payments can also be tax deductible
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