What does the terminology mean?
Who should I use for financing equipment?
What are the different options of finance available?
What benefits do they give to my business?
By JOHN MORRISON First Independent Finance
FINANCE and the Turf Industry
OVER this and subsequent editions of Pitchcare we will try to answer these questions. So, let’s start with the basics as there is a fair amount of understandable confusion. This article looks at the main finance products, their features and general benefits. A little boring? YES! But stick with it, understand the basics and future editions will look at the more interesting aspects of what is available and which is the “best” for your business with some real examples.
Finance Products:
Typical of most industries the finance sector has its own terminology and variations on a theme for most of its products. We will look at the main finance products used to enable you to acquire equipment; ‘Leasing’ and ‘Hire Purchase’.
1. Leasing:
You borrow money to gain use, not ownership, of equipment.
The monies are repaid over a defined period of time by an agreed rental.
Legal ownership remains with the funder.
Taxable allowances and balance sheet treatment vary with lease type.
At the end of the term you will be given options varying with lease type.
a) Finance Lease:
Rentals are calculated on the full amount borrowed over a fixed period of time.
The VAT is spread over the rentals.
The tax ownership is with the funder so you cannot claim any allowances against your taxable profits.
However, the interest element of your rentals can be treated as a business expense against taxable profits.
The equipment value shows on your balance sheet as an Asset and the rental total as a liability.
At end of the finance term you will usually have 3 options:
i) extend the rentals at a nominal annual rental
ii) sell as the funder’s agent retaining the majority (90%+) of the sale proceeds
iii) return the equipment. Benefits:
• fixed rentals from day 1 = ease of budgeting
• protects against inflation or interest rate increases
• VAT not payable in advance but spread over rentals
• Interest element allowable as a business expense
• leaves your cash in your business so improves cash flow
b) Operating Lease:
A future anticipated value is placed on the equipment at end of the finance agreement and the rentals are calculated on the amount borrowed less this ‘residual value’, meaning the rentals will be lower than normal finance. A third party will take the risk in the equipment being worth the residual value.
Operating Lease does not show on your Balance Sheet. You cannot claim tax allowances on the equipment. However, you can treat the total rental amounts as a business expense against taxable profits each year of the agreement.
At end of finance term you can:
i) extend the term at a rental to be agreed with the funder
ii) return the equipment in reasonable condition
iii) purchase it from the funder at a ‘fair market value’.
Benefits:
• lower rentals = improved cash flow
• leaves your cash in your business • pay for use not ownership
• fixed rentals from day 1 = ease of budgeting
• protects against inflation or interest rate increases
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