FINANCE

Finance

Hire Purchase

Hire purchase is a type of asset finance. It's similar to equipment leasing, but simpler (and perhaps less flexible) overall. Rather than returning an asset, hire purchase is like making a purchase and paying in instalments, like a private customer might do for a car. Normally a 20% deposit and all the VAT is paid upfront.

Unlike leasing, with hire purchase your business owns the item, but that means there are a few other things you need to consider:

Hire purchase: considerations

Do you need the asset for the long-term?

First, will your business need the item for a foreseeable future? If the answer is yes, hire purchase could be a good fit. But if you only need it for a short time or you're not sure, leasing might be a less risky route to take.

Will the assest depreciate?

Second, will the asset hold its value? Depreciating items are usally leased rather than purchased - but relating to the first point above, if your business needs it for the long term that could be less important.

Alternatives to hire purchase:

If you need why use equipment finance?, hire purchase isn't your only option. You might also look into a finance lease, which is a similar long-term commitment but you won't own the item at the end of term. On the other hand, for more flexibility, operating leases are a popular choice, because you can often get regular upgrades and maintenance included.

Contract Hire

Contract hire combines an operating lease with a maintenance contract all included in the rental giving predictable cash flow.

Operating Lease

An operating lease is a type of equipment lease where the customer (or 'lessee') rents an asset for a fraction of the item's useful life. An operating lease might also be known as business contract hire, particularly if it relates to commercial vehicles.

Operating leases are the simplest form of equipment leasing, where the customer doesn't take on the risks and rewards of owning the asset (such as maintenance costs). An operating lease is essentially a method of renting an asset for your business over a short or medium timeframe.

Usually, operating leases include some kind of maintenance provision and they often have relatively short lease periods — meaning the lessee has more flexibility than they would with finance leases or hire purchase.

Another indirect benefit of operating leases is that because they usually have short terms, it's possible to upgrade regularly. Some facilities even allow upgrades during the term.

Operating leases or finance leases?

To choose between operating leases or finance leases, there are a few things to think about:

1. Do you want to commit to one item long-term, or upgrade regularly?

2. Are you prepared to handle maintenance and repairs yourself?

3. Will you use the item for most of its life?

4. Do you want the asset to appear on your balance sheet?

Operating leases and contract hire: summary

- Lease period will be shorter than the lifetime of the item

- Basically a rental agreement

- Maintenance usually handled by the lender (reduced risk of ownership)

- Off balance sheet

Finance Lease

A finance lease is a type of equipment lease where the customer (or 'lessee') rents an asset for most of the item's useful life. Finance leases are sometimes also known as capital leases.

One key feature of finance leases is that the customer takes on most of the risks and rewards of ownership (i.e. maintenance costs and fluctuations in value), but never actually owns the asset.

What this means in practice is that a finance lease looks and feels a lot like hire purchase, but they're different on the balance sheet.

Finance leases consist of a primary rental period, where the monthly payments will add up to the full cost of the asset plus interest (hence their other name, capital leases).

Once the primary period is up, the asset will normally be near the end of its useful life. At the end of the primary lease period, you will usually have three options:

1.Continue to use the asset in a secondary lease period (often with cheaper payments)

2.Sell the asset and keep a share of income from the sale

3.Return the asset to the lessor

Finance lease or hire purchase?

For many businesses, choosing between a hire purchase and a finance lease comes down to financials and accounting. With hire purchase, you normally have to pay the VAT up front, whereas with a finance lease you can spread the cost of VAT over the monthly payments.

- Some companies choose hire purchase because the asset shows on their balance sheet

- Others would prefer to show an asset as an operating cost and offset rentals against profit, and so would choose a finance lease

Another important thing to note about finance leases is that the lease period will be for most of the asset's useful life — so it's normally more of a long-term commitment compared to operating leases.

Finance leases and capital leases: summary

- Looks and feels a lot like hire purchase

- You won’t own the asset at the end of the contract

- Asset may or may not appear on balance sheet

- Term is for most of the asset’s useful life

- Risks and rewards of ownership

- Offset rental charges against profits and claim VAT

- May be able to sell the asset and get a rebate for remaining rental charges

Local Council Business Grants

As Regional Growth Fund Grants have now expired as of 31st March 2017, we are yet to be advised by HMRC or Close Brother Plc as to whether there will be more to come in the future. Whilst this avenue of funding has now closed there are still local business funding schemes to be allocated through the Local Enterprise Partnership (LEPs) or through local authorities and organisations such as the Chamber of Commerce. However there were 512 registered schemes as the last count! So a good place to start your research is on the government website.

Business grants are available at a local and national level and usually sector specific. They offer between £1,000 and £100,000 for SMEs, but funds can be unlimited for larger businesses within EU state aid programmes. The Business grants and funding available to U.K small businesses http://smallbusiness.co.uk/financing /government-grants/

With grants you don’t pay the money back. However, it’s worth nothing there will be clawback terms if you falsify claims in respect to expected outputs set by the grant scheme. Therefore, ensure your application is captivating and through as it will go through a due diligence process.

Normally there are two stages, submitting an Expression of Interest (EOI) to ensure your business and grant application meets the scope of the grant call and then a fill application process whereby you will need to supply, market research, a business plan and at least 1-3 years of financial forecasts.

It is always worth getting a second opinion regarding the feasibility and strength of your application against the grant objectives and any regional strategic economic plan. Therefore speak to your accountant, a local business advisor or the Growth Hub, or indeed myself Steve Moorcroft (Finance Director).

The larger grant opportunities can be competitive and therefore be a long-drawn-out process, taking several months in some cases to receive just an offer. So if you are looking for subsidies and money quickly a grant may not be the right solution for your business.

Note each U.K region may have a focus on specific business sectors, business sizes and locations, as eligibility can be even post code specific.

Take a look at the government business funding support finder website - https://www.gov.uk/business-finance-support

Funding For Lending Scheme (Lloyds PLC)

Funding For Lending Scheme brought into practice in July 2012. Under the Lloyds Bank Funding for Lending Scheme, eligible businesses may benefit from a discount of upto 1% on their cost of borrowing. Please feel free to discuss with Steve in greater detail if so required.

Annual Investment Allowance

From the 29th October 2018 Autumn Budget, the Chancellor Philip Hammond presented a radical change to support businesses within the UK.

The Annual Investment Allowance (AIA) has been set at £200,000 since January 2016. As from the 1st January 2019 Mr Hammond has increased this allowance to £1 million in relation to qualifying expenditure for 2 years to 31st December 2020.

Your existing AIA relief of £200,000 is not lost – it will be pro rata to your accounting year end.

Example:

If your accounting year end is the 31st March 2019 then your entitlement will be:

£200,000 x 9/12 = £150,000

£1,000,000 x 3/12 = £250,000

Total AIA relief entitlement = £400,000 for qualifying expenditure in the year to 31st March 2019.

All CNC machinery purchased from Leader CNC is within the allowance of qualifying expenditure.

To discuss in greater detail please do not hesitate to contact our Finance Director – Steve Moorcroft email at - steve@leadercnc.co.uk