Financing New Equipment: What You Need to Know
Find out how to find the right financing deal for your business, the different forms available, and where to go for further help and advice…
The capital outlay required to purchase new equipment can be intimidating – especially for a new business. Equipment finance allows you to spread the burden out over a period of weeks, months or years, gaining access to the equipment in the meantime instead of paying upfront.
Technically, this can work out as the more expensive option but as long as you choose the right deal it could benefit your business in the long run. However, the wrong agreement could see you burdened with a long-term contract that makes little financial sense.
This article includes:
- How to find the right financing deal for your business
- The benefits of equipment finance
- The different forms of arrangement available
- Where to get further help and advice
What are the benefits of equipment finance?
There are many benefits to using equipment finance, primarily because it allows you to save money upfront. Spreading the cost over a period of months or – more commonly – years, allows you to ease the financial burden of obtaining equipment on your business. Some deals also let you spread payments around to accommodate fluctuations in your cashflow such as arranging an initial payment holiday.
Equipment finance is a good way to control your spending: a good financing arrangement will set out the exact payment terms from the beginning, so you’ll know exactly how much you will spend as long as you keep up with payments. Generally, the leasing company cannot deviate from the terms of the agreement, so you can ensure use of the equipment as long as you keep up your end of the deal.
Unlike other loan deals you don’t need to offer anything else as security as the equipment itself acts a security. Failure to keep up with repayments will generally only result in you losing use of the equipment.
At the end of the finance arrangement you are able to replace the item – indeed, some lower-cost finance deals will see the finance company take the equipment back at the end of the lease anyway. Alternatively, if you end up owning the equipment at the end of the term, you can sell it on and obtain new equipment on a finance deal.
The regular payments of a finance deal often include a service or maintenance contract, which is especially useful if you have a piece of equipment that needs regular maintenance like a car or network server. It’s important to read the fine print carefully and check the service contract offers genuine value for money before putting pen to paper.
What types of equipment finance contract are there?
Most equipment finance contracts share a number of common benefits, there are three main types available:
Hire purchase: In this arrangement the finance company owns the asset and lease it to you for a period before you take ownership at the end of the arrangement. You are generally responsible for insurance, maintenance and general upkeep of the equipment. Hire purchase agreements make sense where you want to own the asset past the period of the lease – so whilst it makes sense for, say, a company van, it will make less sense for a laptop that will become obsolete by the end of the loan period.
Finance lease: Here, the equipment is sold at the end of the loan agreement, with you pocketing an agreed portion of the proceeds. Sometimes you will be able to extend the loan agreement at a vastly reduced cost, reflecting the reduced value of the item.
Operating lease: Similar to a finance lease except you don’t share in the proceeds after the asset is sold. Because of this it is generally cheaper than the other options and can be advantageous for tax purposes as well – you can write the loan payments off as a pure business expense.
How will the different kinds of agreement affect my tax position?
Your tax situation is generally dependent on what kind of agreement you choose. With hire purchase you can claim capital allowances on the item, and write off the interest on payments against your taxable profits – but not the payments reflecting the cost of the item. If you are a VAT-registered business, you will normally be able to reclaim VAT on the total capital cost of the equipment.
You cannot claim capital allowances with a lease as you do not own the item, but the rental payments can be written off as a business expense against your profits, and VAT-registered businesses can still reclaim VAT on payments.
Which deal should I go for?
It will make it easier to shop around for specific terms and hopefully avoid expensive mistakes if you’re clear on what kind of agreement you are looking for first. Your individual situation will affect what deal you’re best suited to – but there are some simple rules of thumb all businesses should follow.
It’s important to ensure the company you deal with is a member of the Finance and Leasing Association as members have to abide by a strict code of conduct. You should be wary of any firm that does not have FLA status. Bigger banks and larger organisations generally stick to the rules.
You should also ensure the company has experience in dealing with businesses similar to your own as using a finance firm that doesn’t is likely to result in a deal that doesn’t suit you. You should consider the deals offered by manufacturers as they are more likely to be secure – but may be more expensive.
To make sure you’re getting a good deal it’s wise to get at least three quotes before committing to one. The headline price should be just one element of your decision-making process. Look at the reputation of the firm in particular – what do they have to lose if they fail to keep up their end of the bargain?
It’s easy to dismiss but take some time to read the fine print properly. If you use an accountant or lawyer, get them to check over the terms and conditions and advise you on the best deal. Ensure the leasing company’s name appears on the contract.
Likewise, don’t sign the contract until you are completely sure what you are committing to – it is very difficult to back out of a deal you unwittingly committed to because you didn’t read the terms and conditions properly. The Consumer Credit Act gives unincorporated businesses some protection against unfair deals, but you shouldn’t rely on this.
Don’t get slack as time goes by – be vigilant when it comes to future contracts. Renewals and upgrades deserve the same attention as the original agreement, as the fine print may have changed.
Where do I go for help and advice?
Whilst the advice in this article is a good place to start, never hesitate to seek further help and advice before committing to a finance deal. It is a complex area of finance and with many hazards and pitfalls for the uninitiated.
The Finance and Leasing Association is an accreditation body that should be your starting point for finding finance providers. It can provide you with information about different kinds of finance and direct you to the code of conduct which all members must abide by.
Lastly, before putting pen to paper, you should always consult an accountant or lawyer – the expense of professional help is almost always. Worth it in the long run.