So, you’ve made the decision to look at using asset finance for your latest project. This might be the first time you’ve used asset finance, or you might use it regularly to spread costs, perhaps to retain capital, save tax or simply match costs to your return on investment.
The big question is – How can you be sure you’re getting the best deal possible?
It’s easy right? Whichever gives me the cheapest repayments is obviously the best option.
A rate versus rate comparison should never be relied on in isolation as there are simply so many variables which you need to factor in to truly understand the relative merits of the raw numbers.
There are many but they include the type of facility (e.g. finance lease, hire purchase, operating/residual value lease), the term (or length) of the agreement, any deposit requirements, the profile of the payments, additional fees and benefits such as tax savings.
Pointing the Way
Undoubtedly trying to get to grips with your finance quote can be a daunting process, even for those who have some experience but, luckily, we’ve been doing just that for over 23 years and are happy to share some of our knowledge. Here are just a few tips and pointers to help you get a true comparison.
Using Your Own Bank
Naturally many businesses rely on their primary bank and understandably turn to them for help with other funding requirements. Recent surveys suggest that more than 80% of SMEs rely exclusively on their main bank for all their financing needs and most cite either lack of awareness of alternative finance products, or access to them, as the main reasons for doing so.
In fairness, High Street banks are generally not experts in asset ﬁnance and often rely on specialist and centralised divisions. The most common complaint we hear from our customers about the performance of their banks when they do enquire about asset finance, or other alternative products, is the sheer amount of time it takes to get any form of answer. This might be fine if you’re under no time constraints, but most businesses aren’t that fortunate, and delays can be very costly.
The main points to consider should you seek the help of your bank are:
Check that you know what you are being offered. Very often a loan or hire purchase (HP) product are the default which might not provide you with the optimum outcome, especially with regards to tax beneﬁts.
Often the facility will be limited to just the assets alone and will exclude any additional intangible costs such as labour and fees. Using a specialist, such as Bluestone Leasing, you can often achieve 100% project cost funding.
Often bank facilities require security, typically in the form of guarantees or otherwise. It is noteworthy that over 80% of the facilities that we arrange are on a totally unsecured basis even for relatively ‘weak’ (i.e. those will little or no residual value) assets.
Bank facilities are very typically offered on a rescindable basis with a foreclosure clause as standard. That means that you are at risk should the bank ever decide to call in the debt at any point which they are entitled to do without explanation or notice. In practice this would mean having to pay the full outstanding balance on demand. By comparison, all our facilities are free of this encumbrance – as long as you make the regular repayments, the agreements are never rescindable.
There are many providers out there, not just your own bank, who can help you with asset finance and other alternative products. Please take a look at our post which looks at this in more detail and gives some great advice on choosing a partner to work with.
Once you’ve chosen a partner, and especially if you are looking at more than one offer, you will still need to make sure that you are getting best value. There is no standard way that businesses in the sector present their finance quotations – some might provide a wealth of information and others are little more than the headline rate. There are a few basic elements to make sure you are clear on if you want to fully understand any offer of asset finance and be able to compare it to another.
IS THERE A DEPOSIT OR UPFRONT PAYMENT?
Although it is normal to pay 1-3 payments upfront, larger deposits can artiﬁcially make the repayments look low. An easy way to avoid this is to calculate the total cost of any facility by adding together the standard repayments along with any deposit and indeed any other fees.
For example, one quote (quote A) gives you a monthly repayment of £100 over three years whilst an alternative provider (quote B) offers you £120/month over the same period. On face value quote A is the best value until you discover that quote A requires a £1,000 deposit whereas quote B has no deposit requirement. Total repayments for quote A is actually £4,600 (£100 x 36 + £1,000) whereas quote B is only £4,320 (£120 x 36).
WHAT ARE THE FEES?
Again, although arrangement fees and documentation fees are the norm, make sure you know what they are beforehand and see how they compare to any other offer you may have. Add them into your calculation for the total cost. You can also usually expect a small (£20-50/year) administration fee charged by the funder to cover customer support costs (e.g. replacement/copy documentation) during the term of the agreement.
WHAT IS THE PROFILE?
The proﬁle is normally expressed as the ﬁrst payment followed by the normal payments thereafter. For example, a ﬁve year agreement paid monthly could be offered as a 1+59 (one payment followed by 59 further monthly payments) or 3+57 (three payments upfront followed by 57 monthly payments) proﬁle. Our advice is to be suspicious of unusual proﬁles, especially ones which artiﬁcially look to be better than they are. For instance, if you are offered, on paper, a ﬁve-year agreement but the proﬁle is 3+59, you are actually paying the equivalent of ﬁve years and two months. The monthly amount may look lower a result but will not be so attractive when you compare the total amount paid to an equivalent true 60-month agreement.
IS IT APPROVED?
There is a world of difference between a quote for ﬁnance and an actual approval with funds secured. Make sure that you know what you have been presented with and get conﬁrmation in writing. Professional providers will generally send you a formal conﬁrmation when ﬁnance is approved and you don’t want to ﬁnd that the ﬁgures have changed only when the documents arrive for signature.
Sometimes ﬁnance approvals are subject to conditions from the funder who has underwritten the facility – this might include anything from simple provision of regular management information through to personal guarantees and other security. Ensure that you have been advised of these conditions upfront before you commit.
WHAT HAPPENS AT THE END?
Depending on the type of agreement that you’ve entered into, you might have a range of options at the end of the agreement. If your agreement is fixed term, it will come to an end at the end of agreed period, known as the primary term, whereas a minimum term agreement will continue after the primary term unless you instruct the funder otherwise, giving them suitable notice as set out in your agreement. You might want to give the assets back to the funder or pay a final fee to keep them thereafter forever. If you know what you will want to do at the beginning of the agreement, you can even get that put into writing with the funder upfront to prevent any confusion at the end.
Hopefully you’ve found this guide useful and I’d certainly encourage you to keep a copy on file for when you next consider using asset finance. We have always looked to support our clients with clear, simple advice but we know that’s not always the case in our industry so feel free to get in touch to discuss any project you are thinking of financing or, indeed, any offer you have on the table. Hopefully we can save you a headache!
Steve Russell – Sales Director, Bluestone Leasing