Around 400,000 UK businesses use equipment finance and problems are very rare.

This guidance is intended to help businesses to make sure they get a fair deal when they take out a hire purchase or lease agreement, avoiding any possible pitfalls.

How to choose a broker

Each broker is different. These are some of the factors that could help your choice.

Type of asset and industry:
Does the broker have experience working with your sector and/or type of equipment?

Finance providers:
How many asset finance providers (banks or other asset finance companies) does the broker work with?

References:
Has the broker worked with similar businesses?

Charges:
Does the broker charge any fees in addition to earning a commission or margin?

Location:
Is it important to be dealing with a broker based locally?

Rate:
What rate of interest does the broker expect to achieve for you?

If you would like assistance selecting a broker, please email info@assetfinance500.uk and we will do our best to help.*

* Due to Government regulation we can only help limited companies or larger partnerships

Selecting the best type of finance

What type of equipment finance is likely to be most suitable?

In general:

  • If a business has lots of cash available and is not operating on an overdraft, it is usually better to purchase outright.
  • If the business wishes to own the equipment and doesn't have lots of cash, then Hire Purchase (HP) - sometimes called Lease Purchase - is usually the best option. HP always includes the right to purchase, usually for a nominal extra payment.
  • If the business only wishes to use the equipment (rent/hire) then a lease is usually the best option. In the UK a lease cannot provide an option to purchase the equipment. There are two main types of lease: A lease for a fixed period with an option to extend the agreement for a nominal extra annual rental (typically only the equivalent of the previous monthly rental, often called a Peppercorn Rental); or a lease for a 'minimum period' that automatically extends at the same monthly cost.

Your Company tax position can change things. For example a business that can't afford to pay all the VAT upfront (e.g. because it can't reclaim the VAT) or that can't offset capital allowances against its taxable profits, might find it best to Lease not HP - especially if it is not important to actually own the equipment.


Apart from the cost, are there other factors to compare?

The main differences between types of finance are what they cost and what happens at the end of the agreement (i.e. does the business own the equipment or have to return it?). Some other factors that may be suggested, are:-

  • "Leasing is good because it's off-balance sheet". Nowadays this is not usually the case, but for many businesses it's unlikely to matter whether equipment is shown as an asset on their balance sheets provided they can hire it for as long as they wish.
  • "Leasing is flexible, allowing equipment to be upgraded". Leasing does indeed allow a business to safeguard against equipment obsolescence (as equipment can be changed at the end of each lease period). However if a business wants to get new equipment half-way through a lease agreement it will usually still have to pay most of the cost of the old kit to settle the lease.
  • "Leasing is tax-efficient". The tax benefits really depend on the situation of the business involved - there is no one size fits all answer.


How long should an agreement last?

Normal finance periods range from two years to five years, during which time you are repaying the cost plus interest (unless it is an Operating Lease). Consider your optimum finance period very carefully, because an equipment finance agreement is a firm commitment for a contracted period. Shorter agreements will obviously cost you more on a per-period basis, but will then allow you to make more frequent equipment upgrades without penalty. Longer periods will cost you less each month, but could lead to a settlement figure, if you then want to change the equipment earlier than expected.

Finding equipment finance

Who can provide equipment finance?

Equipment finance can be obtained from many banks, finance companies, equipment suppliers, or through equipment finance brokers. Here are some rules of thumb on the best places to look:

  • Banks often offer the best deals, but they tend to focus on their existing customers and higher value equipment. Also, as Banks may limit their total lending to any customer, it might be useful to consider other options in order to keep your banking lines free for the unexpected.
  • Finance companies may offer good deals, particularly for the sectors or types of equipment that they specialise in. Some are non-specialist and can assist with most equipment types.
  • Equipment suppliers may fund the equipment themselves, or introduce their customers to a finance company or equipment finance broker instead. This is often very convenient and can be a good deal, but it can be useful to obtain an alternative finance quote for comparison purposes.

Equipment finance brokers know the market and should be able to identify a reasonable deal. In general there's no direct charge to you, as they earn commissions to the finance for introducing your deal. See the guidance below on how to select a broker.


What's the best way to find an equipment finance broker?

There are over 500 brokers listed on assetfinance500.uk

As these are listed without recommendation, here are some guidelines for selecting one:

  • It's often useful to meet the broker and discuss your needs face to face, so consider approaching one in your area (all the listings are sorted by postcode).
  • If the broker is part of the industry trade association, the NACFB, this should provide some additional assurance since their members subscribe to a published code of conduct, or they may be able to provide references


What else should I ask a broker?

A good broker will discuss all the alternative equipment finance options and help you to decide which is most suitable for you. It's still important to consider the cash flow and ownership tax implications specific to your business with your accountant.

  • Cover of all the issues mentioned in this guide
  • Ask what the facility is likely to cost (even at an early stage they should be able to provide an approximate figure).
  • Ask them to include all fees and charges to ensure there are no surprises


Do I pay a broker?

Brokers will either add a commission margin to the rate offered by a finance provider or negotiate a fee from you. Brokers should not take a fee from you and also a commission from the finance provider without declaring this to you in advance.

Reputable brokers do not generally ask for fees up front


How many quotes?

Consider obtaining more than one quote as comparing quotes can help to identify any issues.

Loooking at quotations

Is it clear what type of finance you are being offered?

Whatever a finance arrangement is called or however it's described, check the agreement to see what happens at the end. If there's a right to purchase the equipment, it's HP. If not, it's a lease. If in any doubt, check whether the VAT will be charged up front; if so you are buying on credit and it is HP.

If there is VAT on the rentals it is a service, so you are hiring the equipment with no right to purchase.

Make sure it is based on the equipment cost as you understand it


Are there any extras?

When you see the contract, make sure you check it for any extra costs, in addition to the regular monthly or quarterly payments. These might be described as set-up, administration, documentation, or annual fees. They might be excluded from the calculation of the rate of interest for the agreement, which can make it difficult to compare alternative quotes. An annual fee of £100 per year would add 1% to the annual interest rate on £10,000 of equipment finance. Be wary of any finance provider or broker who does not include all fees and charges in their initial indication or quote.


Is it a fair deal?

There are many expert ways of analysing quotations, but as a bare minimum, add together the total cost (all rental payments and any other fees and charges) then compare this to the cost of buying the equipment outright and make sure you think it is affordable/reasonable.

Could you be misled?

You might be promised things that are outside of the finance provider's agreement, such as free accessories or supplies, cash rebates, upgrades, transfer of ownership, etc. If the promises aren't in the finance provider's agreement, they may well not be honoured. Do not rely on side letters or promises from brokers or equipment suppliers.


Who is providing any 'extra' services?

Maintenance, supplies, consumables etc., may be supplied by a third party (i.e. not the finance provider). If that firm proves unreliable, gets into difficulties, or is fraudulent, will you be able to find an alternative source and still pay for the equipment. Generally the customer is still liable for the full cost of the agreement even if such additional services are not delivered.


What are the return conditions?

Under a lease the equipment will have to be returned at the end of the agreement. Check the contract for any onerous conditions, e.g. the condition the equipment must be in and how and where it must be returned.


Is there a balloon rental?

Check the agreement for any higher payments at the end of the agreement period (often called a 'balloon payment'). These can make the initial monthly costs appear artificially attractive, by pushing a lump sum repayment to the end. This may suit you, but consider how you would be able to pay this when the time comes, as it cannot be avoided.


Is extra security required?

An advantage of equipment finance compared to bank loans is that it is often secured largely on the equipment being financed. The finance provider will usually require a deposit to be paid, but in general will not need additional security (such as a charge over business or directors' personal property). If additional security is required it may be worth checking other providers.


Is a bundled deal good value?

If the agreement 'bundles' equipment finance with services e.g. maintenance, supplies, consider whether it would be better value to buy the extras separately.


Is it negotiable?

Leasing rates vary considerably depending on a whole range of factors, including the broker's commission, the various risks to the finance provider, such as your credit status; the type of equipment; their own cost of funds and the costs of providing the agreement over time. There may be room for some negotiation from the first quote offered especially if you are prepared to shorten the term, increase the initial payment, or offer further security. In particular if you are not happy with any additional fees, consider asking for them to be adjusted or waived.

Before signing

Has anything changed?

Always check the actual contract proposed for additional fees or charges not mentioned in the original quote. If there are any, challenge them (and consider whether you want to deal with such a firm).


Who are you dealing with?

It is fairly normal for equipment suppliers and brokers to act as the agents of others, or to sell off or assign finance contracts to other parties. Check that you understand precisely who you are going to be contracting with and make sure you are happy with this arrangement.

During the agreement

Is the lender's insurance the best deal?
 

Once the agreement has started, finance providers or their agents are entitled to write and ask for details of the insurance policy covering the equipment. If this is not provided, they may then start charging you a monthly fee for suitable cover.

  • Check whether your existing insurance policies cover the leased equipment. If not, consider getting them changed or taking out a new policy for the equipment. Commercial finance brokers may suggest a provider to use.
  • Ensure your insurance details are sent to the finance provider when requested by them.
  • If you do not opt out, check you are happy with the alternative cover being provided. Better deals might be available from other insurance providers.
  • Do not disregard letters from the finance provider on this subject and make sure you have been given the opportunity to opt out if you wish to.

 

When does a good thing come to an end?

For 'minimum period' leases, it's important to know when the minimum hire period will end. Unless it is cancelled, the agreement can carry on indefinitely, often at the same cost. Be ready to terminate whenever you no longer need the equipment. After the agreement is cancelled it may well be possible to obtain new equipment for a similar cost. Most leasing companies will send a reminder that the minimum period is about to end, but don't rely on receiving this. It may be necessary to give notice for returning equipment if no longer required.


What happens if there's a problem?

Problems with asset finance agreements are rare but can occur. If there's a problem with the equipment the finance company may not be able to assist, unless the agreement clearly states that they will. So make sure you choose the equipment you want from a reliable supplier. Your statutory rights persist. In general an equipment finance agreement has to be paid regardless of any problem with the equipment. For other problems, such as billing difficulties, contact the finance company. If the problem is not resolved, all finance companies should have formal complaints procedures so ask for details.

End of agreement


What happens at the end of the agreement?

  • Hire Purchase: After the last payment is made under the agreement, ownership of the equipment will transfer or any lien will be released.
  • Lease for a fixed period with an option to extend the agreement for a nominal extra annual rental: The lower rentals should start automatically unless the equipment is returned or other arrangements have been made, but check it happens.
  • Lease for a minimum term with on-going rentals at the same monthly cost: If the equipment is still needed, negotiate with the finance company for its continued use.
     


How do I return equipment?

Check return conditions carefully and adhere to them. Take pictures of the equipment before it is collected and ensure it is insured during transit.