We sat down with Bluestone Leasing’s Managing Director, Vineesh Madaan, to go through all the facts and options when it comes to finance to make sure you can make the right decision when it comes to financing your next project. Here’s all you need to know on Finance Leases, Hire Purchase, Operating Leases, Business Loans & Cash.
Finance Lease:
How Does Leasing Work?
When businesses want to acquire assets, they have several options, they can pay cash or look to finance these via leasing. Leasing works where the finance company pays the supplier for the equipment and in turn then becomes legal owners of the equipment, they then lease/hire the equipment back to the end user, the payments are charged plus VAT, which can be reclaimed as normal.
What Are The Benefits of Leasing?
There are several benefits to leasing, naturally a big one is retaining cash, why pay out for something upfront when you can pay over time for it. Another significant advantage are the tax savings, Leasing is highly tax efficient method of acquiring equipment whilst spreading the cost of paying for it.
What Type of Assets Are Best Leased?
Any assets can be financed but the majority must be tangible, some funders only require a minimum of 50% tangible others need it to be 80% plus. The benefit is that a lot of intangible items can be incorporated into the finance. This form of finance tends to suit assets that depreciate in value so can be refreshed at the end of the finance agreement.
What rates Am I Likely to Pay when I Lease?
This depends on the credit rating of your organisation along with the amount being financed, the better the credit rating and bigger the lend the better the rate.
What’s the Tax Treatment of Leasing?
100% of the repayments are allowable against taxable income, for example if your taxable profit is £100,000 and the tax rate is 19% you will pay £19,000 in tax, if you were to make £20,000 in lease payments then you would pay 19% of £80,000 i.e. £15,200 in tax, saving you £3,800 in tax.
What Are the Negatives of Leasing?
You do not or will never legally own the asset, so if asset ownership is your thing then this will not be the product for you.
What Happens at the End of Leasing Term?
At the end of the agreement, you must cancel the agreement with the funder once this happens rather than to continue to pay rents you can pay a one-off infinite rental to retain uninterrupted continued use of the asset, allowing you to do what you want with the assets.
Hire Purchase:
How Does Hire Purchase Work?
The asset is paid for by the finance company, they will want the VAT to be paid up front on the cost of the equipment, this can be claimed back as normal. The finance company then charge a regular payment to the end user, the last payment has an additional option to purchase fee which transfers legal title to the customer.
What Are The Benefits of Hire Purchase?
You have the legal right over the asset allowing you to claim capital allowances including any enhanced capital allowances that maybe available. Also subject to you making all the payments you will become the legal owner of the asset.
What type of assets are best bought with Hire Purchase?
Assets that retain their value are generally financed under this method, because at the end of the finance ownership will be retained. Also should the end user want to utilise enhanced tax allowances then they would use this method.
What rates Am I Likely to Pay with Hire Purchase?
This depends on the credit rating of your organisation along with the amount being financed, the better the credit rating and bigger the lend the better the rate.
What’s the Tax Treatment of Hire Purchase?
The asset is classed as owned by the company so the end user will claim capital allowances as it would normally do for any other asset it owns, the end user can also claim the interest paid on the finance against taxable income.
What Are the Negatives of Hire Purchase?
If you do not have any enhanced capital allowances gaining full tax deduction for the purchase of the asset can take an exceptionally long time, also the VAT needs to be paid upfront so needs to be factored into cash flows.
What Happens at the End of Payment Term?
Once all the payments are made including the fee then the agreement ends and ownership of the asset is transferred to the end user.
Operating Lease:
How Does an Operating Lease Work?
The finance company pays the supplier for the equipment and in turn then becomes legal owners of the equipment, they then lease/hire the equipment back to the end user, the payments are charged plus VAT, which can be reclaimed as normal.
What Are The Benefits of an Operating Lease?
The best use of this type of finance is for assets that have a residual value and where the asset needs refreshing on a regular basis. As the funder has taken a residual value, payments are lower and the asset is handed back at the end of the finance term and a new assets are financed again and so on.
What Type of Assets Are Best Bought With an Operating Lease?
They have to have a value so the finance company can recover their residual value with a profit. It works well for IT equipment.
What Rates Am I Likely to Pay With an Operating Lease?
This depends on the credit rating of your organisation along with the amount being financed, the better the credit rating and bigger the lend the better the rate.
What’s the Tax Treatment of an Operating Lease?
100% of the repayments are allowable against taxable income, for example if your taxable profit is £100,000 and the tax rate is 19% you will pay £19,000 in tax, if you were to make £20,000 in lease payments then you would pay 19% of £80,000 i.e. £15,200 in tax, saving you £3,800 in tax
What Are the Negatives of an Operating Lease?
You will never own the asset, whist your payments are lower, you will need to re-invest on a regular basis and if you want to retain the assets the costs would be higher than a standard finance lease.
What Happens at the End of Payment Term?
The assets are returned to the finance company where fair wear and tear is allowed, if there is any more damage the cost will need to be covered, alternatively the finance company can be paid out of their residual for continued use, this will be an expensive option.
Business Loan:
How Does a Business Loan Work?
A loan as it sounds is where a company is financially assessed and if they qualify a funder provides them a loan in return the company make regular repayments to cover the loan and interest.
What Are The Benefits of a Business Loan?
A loan allows the business to use the funds for anything so does provide greater flexibility.
What type of assets are best bought with a Business Loan?
Any as the loan is paid to the business for them to use as they wish.
What rates Am I Likely to Pay with a Business Loan?
This depends on the credit rating of your organisation along with the amount being financed, the better the credit rating and bigger the lend the better the rate.
What’s the Tax Treatment of a Business Loan?
For the loan itself the interest on the repayments is deductible against taxable income. Should the loan be used to purchase an asset then capital allowances can be claimed as normal.
What Are the Negatives of a Business Loan?
Loans may require additional security. It can also tie up main bank lines of credit reducing the ability for future growth.
What happens at the end of payment term?
Once all the repayments are made then the loan just ends.
Cash:
What Are The Benefits of using Cash?
Saves paying any interest or taking out any debt.
What Are the Negatives of using Cash?
Cash is key for any business to survive so retaining cash is key, utilising all your cash when things could be financed is not safeguarding the future of the business.
Bluestone Leasing Blog 