What is asset finance and what are the advantages to asset finance and leasing?
Asset finance is a term used to essentially describe a business purchasing a piece of equipment and simply spreading the cost – usually equipment of high value. This type of finance is used by organisations who have the need or the opportunity to grow their business but perhaps may not have the cash readily available & would prefer to spread the cost over a longer term. We all know that cash is king for any business but it isn’t just businesses who don’t have the cash to hand, a lot of businesses use this due to the overwhelming tax advantages.
The main advantages to asset finance over a cash purchase:
- There would be a much smaller or no upfront cost at all
- Spreads the cost of items rather than requiring a large lump sum payment
- Fixed payments make it easy to budget for the costs over the long-term.
- When using asset finance to purchase a piece of equipment, the equipment itself acts as the security
- Gives you access to more expensive equipment or higher spec equipment which may seem unattainable when paying cash
- It allows the business or school to protect their capital to make purchases outside of those available to this type of finance
- A great alternative to other lending methods such as a bank loan or overdraft, which typically charge higher interest rate
- It is also a great way to offset tax liability using tax relief
What is tax relief?
Tax relief is the amount of money your business corporation tax bill can be reduced by. E.g. – If your business makes a profit of £25,000 and your corporation tax rate is 20% that means that a corporation tax liability will arise of £5,000
How does tax relief with asset finance and leasing to reduce your corporation tax bill?
If during the tax year your business spends £3,000 on asset finance or leasing equipment then instead of paying 20% corporation tax on £25000 you would only pay 20% of £22,000 i.e. £4,400. Therefore, the corporation tax liability would reduce by £600.
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