A company's assets includes its employees. A company would not expect to pay upfront for the value to be added by its employees over years of employment, but instead would pay in installments as the employees deliver value - monthly or weekly.
In the same way, a company should not expect to pay upfront for the value to be added by its other assets - such as vehicles, plant, machinery, and equipment - over years of employment, but instead would pay in installments as the assets deliver value - monthly or weekly.
Each company's circumstances will need to be assessed individually to determine the actual benefits of installment-type financing to it, however, the potential benefits for a company include:
- Paying over time for an asset saves the company from the cash burden of raising all of the purchase price upfront,
- Off-balance sheet accounting treatment,
- Maintenance is undertaken by the supplier,
- No worries over the asset's residual value if it were sold in the open market,
- An option for the company to either return the asset to the supplier before or at the end of the rental agreement, replace it with another asset, or purchase the asset,
- Tax savings versus purchasing the asset.
A transport company needed a vehicle for a new route. The vehicle was acquired with £75k 100% funding by using it and other vehicles as security.
|Plant, machinery, equipment
A new office workspace business needed computers, office furniture, gym equipment and catering equipment. A leasing company provided a lease for some of the equipment - including an option for the lessee to either buy the equipment or return it at the end of the lease to the lessor.
A retail company that had obtained a confirmed order was unable to purchase stock to fulfil it. To solve the cash deficit, a funding facility was arranged that provided a payment upfront for the stock.
* The transactions described on this web page were not arranged by ACF.