One of the most important elements for every business is having the latest tools and tech. In order for businesses to remain competitive, maintaining up to date and efficient kit is key.
Faced with increasingly competitive market conditions, business owners are constantly having to balance the cost of remaining ahead of the curve by maintaining the latest kit and most efficient equipment with the risk of falling behind competitors and losing customers.
Can you afford to keep up? The real question may be, can you afford not to?
One of the challenges is the issue of cash flow which can present difficulties for businesses looking to purchase new assets.
Rebecca Yassin, Associate in Banking & Finance at MacRoberts LLP, explains what your funding options are for necessary equipment.
There are a range of financing options – alternatives to the usual term debt – which are open to start-up businesses. Asset finance in particular is a method of lending to assist with the purchase of new equipment to help a business to grow and develop. Any asset can be financed. Crucially, asset finance is beneficial for managing cash flow and helping businesses to budget. By utilising this option businesses can obtain immediate access to equipment, and the leasing and repayment plans can be tailored to business needs.
We have summarised some of the key features of the financing options below:
1. Equipment leasing
A leasing company will lease an asset to a business in exchange for rental payments. This allows the business to take advantage of all of the practical benefits of ownership without the risks and without actual owning the asset.
There are two main types of equipment leasing – Operating leases and Finance leases.
Operating leases (often known as “contract hire” for vehicle leasing)
- short or medium timeframe (shorter than the lifetime of the asset);
- business do not take on any of the risks of ownership;
- maintenance and insurance obligations remain with the leasing company;
- leased asset remains off the business’ balance sheet which has tax benefits, meaning it can offset rental payments against profits. This means that the effect of operating leases on financial leverage and earnings of a company is not evident from the face of the balance sheet; and
- possibility of upgrading the leased asset throughout the lifetime of the lease, if not at the end of the term.
- longer-term lease (majority of the leased asset’s lifetime);
- business will take on most of the risks and rewards of ownership (e.g. maintenance obligations and fluctuations in value) but the business will never actually own the asset;
- at the end of the initial rental period, the business can continue to lease on a new lease period, return the asset to the leasing company or sell the asset and keep a share of the income from the sale;
- asset does not show on the balance sheet of the business; and
- VAT is spread across the monthly payments.
2. Hire purchase
Hire purchase allows a business to buy assets on credit and is a better option if the asset is required for long-term business needs.
Some of the key features of a hire purchase arrangement are:
- buying an asset but paying for it in installments;
- the business has the option to buy the asset for a nominal payment after the payment of the last installment;
- protects working capital;
- the item will often appear on your balance sheet from the start of the rental term;
- the business will be responsible for the maintenance and insurance costs; and
- VAT on the asset is paid upfront on the entire VATable amount and no VAT is payable on the rental payments.
3. Unlock Cash and Value in Existing Assets
Another method of unlocking cash and improving working capital for business growth is by borrowing against your business’ existing assets.
Lenders will loan funds to you and take security over your equipment. If you can’t keep up with the loan repayments, the lender can take ownership of the asset as repayment. Companies may also decide to sell the asset to a funder or a bank, in order to receive a cash sum, and lease it back.
Some of the advantages of this option are:
- agreements can be paid in short time frames;
- funders are generally quite flexible as to the type of assets they will finance;
- releases cash flow into the business; and
- still takes into account depreciation of the asset.
These are alternative way of unlocking cash in your business which would otherwise be “locked up” in assets.
Which type of finance is right for your business?
|Operating Lease||Finance Lease||Hire Purchase|
|Ownership of the asset?||No||No||Yes –
at the end of the rental period
|Appears on balance sheet?||No||No||Yes|
|Duration||Short to medium term||Longer term||Longer term|
|Responsible for maintenance
obligations remain with leasing company
A helping hand?
Another potential avenue which is often overlooked by companies is the potential for grant funding. Many businesses wrongly presume that they are not eligible for such assistance and often that is not the case.
The Regional Selective Assistance grants which are made by Scottish Enterprise are an example of financial assistance which is given to companies which plan to make a capital investment which will result in job creation or safeguarding in certain areas of the country. See our article on Sources of grants and funds.