Tag: Finance

Recently we published an article about the main types of finance products available in the United Kingdom. You can read that article here.

We received a lot of positive feedback from the people who read the article. The main question they raised regarded the end of term treatment of the asset on a finance lease.

Therefore, we thought it would be useful to put together some information relating to how finance leases usually work at the end of term.

As you may expect, all finance companies have slightly different methods for treating the end of lease with their customers based on their own accounting principles, but the usual practices are listed below.

• The hirer may enter a secondary hire period and continue the lease.
• The hirer can be appointed as the ‘sales agent’ by the finance provider and is then able to sell the asset to a third party on their behalf.
• The asset can be returned to the finance provider.

 

Continuation of Lease

This option usually has the lowest cost associated with it. As the asset has already had its capital outlay covered, continuing to lease an asset can be the most attractive option in terms of cash flow.

Your initial agreement should allow for your lease to continue at the end of the term, and also should show the value of continuing to do so. A finance company would normally only be looking to cover their admin costs at this stage, and all options would still be open to you in the future.

This is a great option if you are undecided about the next step for the business or the asset. You can effectively tread water for a period at your discretion, and then decide if you wish to take either of the other options or continue with the lease.

This is especially good if you potentially have a buyer lined up for a sale and need time to get the sale through. Or if you are looking at other options for equipment and wish to use the asset leased as a stop gap until you have decided.

 

Sales Agent Option

In our experience this is how the process is designed to work.

• The finance provider appoints the lessee to act as a sales agent to dispose of the equipment on the lessor’s behalf.
• The lessee sells the asset for Fair Market Value to an unconnected third party.
• Most lessors will be able to introduce the lessee to an unconnected third party if needed.
• Once the sale is complete, the hirer receives a pre-agreed percentage of the sales proceeds back from the lessor, often referred to as a “rebate of rentals”.

This is a great option if the lessee wants to be able to sell the equipment in the future and generate revenue from the proceeds. The lessee could alternatively agree their own commercial arrangement with the third party to take title if required.

 

Return

Returning the asset could have benefits for your business if you are looking to continually change your equipment, or if you have decided to take the business in a new direction and have no use for this equipment anymore.

On your agreement you will have the ability to return, however there could be costs involved in this option as you will be giving an asset back to a finance provider, who may not be able to handle it efficiently.

Ultimately the benefit of finance lease over Hire purchase is that generally the upfront capital required is a lot lower, and you have full flexibility and control with the asset at the end of the term.

 

We hope that you found this article useful, and as always if you have any questions, please just speak to us.

James, Paul, Theo, George, Oli and Liam

The Ninaksi Team

 

Some further reading and information (not affiliated or endorsed by Ninkasi Rentals) can be found by following the below links:

https://www.ukbusinessforums.co.uk/threads/finance-lease-for-van-ending-what-do-do.345456/

https://www.advanceleasing.co.uk/services/end-of-lease-services/

https://www.addleshawgoddard.com/en/insights/insights-briefings/2019/tax-and-structuring/vat-update-fmv-leases/

https://app.croneri.co.uk/feature-articles/buy-hp-finance-lease-or-operating-lease-introduction-accounting-and-tax

https://maxxia.co.uk/asset-finance/finance-lease/

https://www.bermans.co.uk/asset-finance-publications/article1/

Please note that all information contained within these articles is produced as summary of our experiences and does not constitute financial advice. Any information contained within third parties’ documents are not attributable to Ninaksi Rentals and must be read at your own discretion. Ninkasi rentals always advise that independent financial advice should be taken before signing any financial documents.

 

 

 

A lot of our customers ask us how equipment finance works in the industry and the difference between the various finance options.

There are quite a lot of myths and misunderstanding, below is a simple guide which we hope will help you better understand the terms that finance companies use, and importantly the difference between them.

There are three main finance options offered in the United Kingdom, we have listed them below.

 

Operating Lease

With an operating lease, the lease will normally run for less than the economic life of the asset, as such the finance company (the lessor) will continue to have an economic interest in the asset. It is therefore expected that the asset will have a significant residual value at the end of the primary lease period.

The customer (lessee) gets to use the asset over the agreed lease/rental period, but the payments made do not cover the full economic life of the asset. As opposed to a finance lease where the full cost of the asset is charged over the life of the agreement.

An Operating lease is likely to also include other additional services, some examples of which would be realising procurement risks, the stocking of goods ‘off the shelf’, delivery/installation of items, insurance and replacing faulty goods from stock.

At the end of the lease period the lessee may have all/any of the following options:

• Return the asset to the finance company
• Continue to rent the asset in terms agreed in an extension period
• Negotiate a custom deal with the finance company

With an Operating lease the assets remain on the lessor’s balance sheet and the rental is treated as a cost item in the lessee’s profit and loss.

A rental agreement is a form of Operating Lease.

 

Finance Lease

With a finance lease the finance provider (the lessor) buys a specific asset and rents it to the hirer (the lessee) for an agreed period.

The finance lease commits the lessee to make payments for the cost of the asset. As the asset is still owned by the finance company, the lessor manages the VAT and accounting principles for the agreement.

At the end of this period of leasing (usually called the primary hire period) there will normally be several possible options open to the hirer.

• The hirer can sell the asset to a third party on behalf of the finance provider.
• The asset can be returned to the finance provider
• The hirer may enter a secondary hire period, typically for a “peppercorn” amount

Note – A lessor cannot give the lessee a documented right to purchase the asset at the end of the lease for a pre-determined value. This would change the lease into a hire purchase agreement changing the VAT and accounting treatment with negative cash flow implications for the lessee.

For more information about end of term options on a finance lease, please see this article.

 

Hire Purchase (sometimes called lease purchase)

The point of a hire purchase agreement is that the asset is on hire from the finance provider until the final payment, at which time the title passes to the hirer. As it is understood between both parties that title will pass to the hirer at the end of the initial agreement, a hire purchase agreement is treated as a purchase for tax purposes, accountancy, etc.

With a hire purchase agreement, the hirer is therefore required to pay all the VAT due on the asset purchase up front, in addition to any deposit required by the finance company.

The hirer must treat the asset as owned, so it must be shown on its balance sheet and depreciated in line with its usual accounting standards. Of course, this this has implications in terms of other borrowing or covenants that the bank may have on the business.

 

We hope that you found this article useful, and as always if you have any questions, please just speak to us.

 

James, Paul, Theo, George, Oli and Liam

The Ninkasi Team

 

You can read more about different finance products by following any of the links below:

https://www2.deloitte.com/uk/en/pages/audit/articles/ifrs-16-leases.html/

https://www.ukbusinessforums.co.uk/threads/finance-lease-for-van-ending-what-do-do.345456/

https://www.advanceleasing.co.uk/services/end-of-lease-services/

https://www.addleshawgoddard.com/en/insights/insights-briefings/2019/tax-and-structuring/vat-update-fmv-leases/

https://app.croneri.co.uk/feature-articles/buy-hp-finance-lease-or-operating-lease-introduction-accounting-and-taxhttps://maxxia.co.uk/asset-finance/finance-lease/

https://www.bermans.co.uk/asset-finance-publications/article1/

Please note that all information contained within these articles is produced as summary of our experiences and does not constitute financial advice. Any information contained within third parties’ documents are not attributable to Ninaksi Rentals and must be read at your own discretion. Ninkasi rentals always advise that independent financial advice should be taken before signing any financial documents.