Financing Equipment

2. Types of Contract

If equipment finance might make sense in your circumstances, you need to decide on the type of contract.

2.1 If you want to own the asset at the end of the agreement, go for a hire purchase (sometimes called a lease purchase) arrangement.

• A purchase arrangement makes sense when the asset would be worth more to you than the finance company could make by selling it second-hand.For example, PCs lose value fast, because new models with greater functionality are introduced.But if you do not need machines with greater functionality, it might pay you to keep your existing PCs going.
• Negotiate the payment arrangements you want. You might want payments spread evenly over the term of the agreement.Or you might want lower regular payments, but a bigger final payment (a 'balloon' payment). This will only be available on equipment with reliable second-hand value.
• You could hedge your bets by going for lower payments, and making a decision on selling or keeping the equipment nearer the end of the contract.But you will have to meet the 'balloon' payment in full, whether or not you decide to sell, and whatever the equipment is worth by then.
• The asset remains the property of the finance company until the final payment is made.You are responsible for insurance and maintenance, and must not let the equipment out of your possession.

2.2 If you do not want to own the asset at the end of the period, go for a lease instead.

• With a finance lease, the asset is sold to a third party at the end of the agreement, and you receive most of the proceeds as an agreed rebate.Alternatively, you may be able to extend the agreement for another term, at a much lower cost.For example, the quarterly payment on the first agreement might become the annual payment on the second.
• With an operating lease, you make lower payments in total but do not normally share in the proceeds when the equipment is eventually sold.Many finance companies offer operating leases only on assets which are easy to sell. For example, cars.Provided that an operating lease fulfils the requirements of the 90 per cent rule, it may not need to be shown on your balance sheet.
• As with hire purchasing, you are responsible for maintenance and insurance.