Asset finance aids companies in obtaining funds to purchase assets that one may require to run a business successfully. Sometimes paying enormous cash at a given point of time can be complicated to manage especially while purchasing assets. It might also affect the organization’s working capital. By taking advantage of Asset Finance many company can increase its capital for purchasing assets and also the borrowed money can be easily paid back to the financial company through standard payments on an agreed time period.
Essentially most of the leasing agreements tend to work on basic principle of taking an asset on rent through the third party. The third party is generally, a finance company and the asset is taken on rent for fixed period. This contract is known as lease. Leasing always plays a vital part especially in property market wherein the properties are basically leased out for tenants. Moreover, leasing has always been a popular way for financing business growth and even to deal with different financial difficulties.
Typically a Asset Finance Lease will work like mentioned below:
* A new asset is required by a business i.e. Factory needs a new and expensive equipment
* Factory then reaches with an agreement to a lessor
* Lessor then purchases the required machine from seller
* After purchasing the machine the lessor then rents out the machine to factory as per the leasing agreement for a fixed period.
* Once the lease period comes to an end the machine is either returned back by the factory or the contract is again renewed by the factory with lessor.
Leasing helps in improvising the cash flow for organizations because expensive expenditures such as buying assets are kept at bay by a lessor and only a rental fee has to be paid by the organization. Even though this rental fee is usually higher than the cost of buying the asset, however the cost is evenly spread by means of rental installments.
In Asset Finance Leasing the asset is owned by lessor and not the business hence the outstanding cost of acquiring the ownership of assets like machinery are compensated. This would basically mean that businesses could always upgrade an asset once it has reached obsolescence without worrying about the money involved in selling or even disposing the asset. Unlike various loans many of the Asset Finance leasing agreements are considered as an expense and not like a debt.