If you are about to undertake a project of any size and want to consider finance, as an alternative to paying capital upfront, then let’s take a look at some of your options.
To simplify matters we will exclude property and vehicle finance from our review. Both are specialist areas, worthy of a standalone discussion in their own right, so we will concentrate on just about everything else that a business or organisation like yours might wish to invest in.
If it is vehicles that you are interested in, please visit our specialist division, Bluestone Vehicles, here.
Let’s take a look at the most popular forms of finance available to you, what they can be used for, their benefits and key considerations.
Probably the most popular form of asset finance, a finance lease, sometimes referred to as lease rental, allows you to make small, regular repayments over an agreed term (usually 3-5 years) typically determined by the useful life of the asset. As the bank technically own the goods during the agreement, a finance lease is fully tax deductible (both the capital and the interest) which makes this product attractive to profitable, private businesses in particular and even more so for partnerships and sole traders who typically pay higher rates of tax.
The VAT is also spread throughout the agreement which is helpful for cashflow (depending on timings in relation to your VAT returns) and can be really useful for those who cannot reclaim VAT at all.
At the end of the agreement you will have options including returning the assets to the funder, carry on renting or paying a final fee to keep the goods thereafter.
Flexible and tax efficient, a finance lease suits a broad range of assets and can be used across all manner of projects from IT, through to furniture and fit out.
Click below to see our short video on finance leases.
Probably the most recognised asset finance product given its popularity in personal finance, hire purchase (HP), sometimes referred to as lease purchase, is best thought of as just like using capital but with the costs spread over time. Unlike a finance lease, you take automatic ownership of the goods at the end of the agreement, subject to having made all your payments on time and a small Option to Purchase (OTP) fee.
Tax treatment is very similar to using cash whilst the VAT is also payable in full upfront, again, just like using capital.
HP is suited to assets that hold strong residual values and ones that you know you will want to retain and use well beyond the term of the finance. Plant and machinery are good examples of assets suited to HP.
Click below to see our short video on Hire Purchase.
Operating leases see the funder, or lessor, take “risk and reward” by setting a residual value “RV” against the assets which represents the value they would expect the goods to be worth at the end of the agreement. The risk is if they don’t achieve the RV, the reward is if they achieve more.
Repayments can be considerably lower than an equivalent finance lease as repayments are based on the total value of the asset less the RV and the VAT is spread, just like a finance lease. A key difference between a finance lease and an operating lease is that you cannot enter into an operating lease if there is an intention for you to retain the assets at the end of the agreement.
Strict accountancy rules govern what constitutes a ‘true’ operating lease as operating leases used to be the only form of asset finance that could be treated “off balance sheet” and handled purely through the profit and loss account. Being able to keep a lease off the balance sheet meant being able to reduce debt, increase net worth and was extremely popular amongst large, listed companies sensitive to share price and investor relations.
Things changed in January this year when one of the biggest international accountancy standards bodies, the International Accountancy Standards Board (IASB), revised its guidelines under IFRS16 to essentially make the accountancy treatment of operating leases the same as finance leases.
Operating leases are still used by businesses that subscribe to different standards (such as UK GAAP) where the rules haven’t changed, by all state funded primary and secondary schools (who, constitutionally, can only enter into operating leases) or by those who see the benefit of lowering their repayments.
Due to the need for the lessor to be able to set a residual value, typically operating leases are much more restricted with regards to the type of assets that can be funded (they have to support the RV), the term of the agreement (shorter to protect the RV) and inclusion of any non-asset costs in the agreement (which would weaken the RV).
Click below to see our short video on operating leases.
Some projects have little or no actual assets involved at all and, as such, are not suitable for leasing. Take for example a business looking to set up a bespoke e-commerce platform where the costs are exclusively fee-based for programming, design, development, training and implementation. Although the platform will no doubt be of great value to the business when complete, it has no realisable value to any lessor, offers no security and cannot be defined as an asset for financing purposes.
This is a good example of where a commercial loan might work. The loan would be over an agreed term and would be on either a secured or unsecured basis. Secured loans would typically be against a range of assets such as property, plant and machinery, vehicles or even stock. Unsecured loans will not have such physical security but will often require personal guarantees where good personal net worth and UK home ownership are key.
Click below to see our short video on commercial loans.
What About Rates?
There are a number of variables which will influence just how much you are likely to pay. Here are just a few of the regular ones.
- First and foremost, will be the covenant of your business or organisation. If you are well established, have healthy financials (profitable, positive trends, strong balance sheet) and are in a performing sector, you will attract the broadest interest and the best terms.
- Secondly will be the asset itself. Some assets offer greater security to the lessor than others and that is reflected in the rates that they will offer. For instance, finance for a forklift truck (strong residuals and easy to resell) will always be secured on better rates than, for instance, office furniture. The asset will also affect the term the finance is offered over.
- The capital value of the project will affect the pricing offered. Setting to one side the ease (or not) of underwriting the requirement, the larger the project, typically the better the rates on offer. Surprisingly to some, we can fund from as little as £500 upwards, but rates reduce as values increase.
- Supplier covenants mustn’t be forgotten. If the lessor is concerned about the financial or service quality of a supplier, they may reflect that in their pricing or choose not to offer the finance at all. In some cases, the lessee will have to sign a supplier waiver form taking liability for their choice of supplier should anything go wrong.
What are my chances of securing finance?
Actually, very good. We handle thousands of new finance agreements each year for nearly 10,000 customers just like you. Our success rate is over 92% which is partly to do with our extensive funding panel (over 60 specialist funders) and partly to do with our approach. No “computer says no” response here – we get to know you and your organisation and make it our business to secure you the best terms possible.
Ready to go?
Although we hope this overview and our explainer videos have been helpful for you, whether you are new to asset finance or a regular user, we do realise you probably have more questions and ones more specific to your own needs. The Bluestone Leasing team are ready and willing to assist so feel free to get in touch and we will be delighted to help.