Using leasing to improve your business

Cashflow is king and anything that can be done to ensure you have working capital in the business can only be a good thing.

Therefore, it does seem strange that the only thing many of you lease is your cars; B2B leasing was worth £27.5bn in 2005 and about two thirds of this was for vehicles. However, there are numerous other items that can soak up your cash reserves, which could be leased.

IT and office equipment, furniture and machinery are all available through asset finance deals but are commonly snapped up for face value and placed on the company credit card. This cash could be spent on the recruitment of a high-flying staff member, market research, a new ad campaign or myriad other investments, all of which could boost your sales. Leasing is worth a look.

WHAT ARE THE LEASING OPTIONS?

There are a number of different leasing options available. Under a fi nance lease agreement the payments (usually monthly) will cover the majority of the cost of the asset plus an interest charge. Another commonly used method is operating leasing, which doesn’t tend to cover the whole value of the asset and is usually on a short-term basis. At the end of the lease you tend to be given the option of releasing or buying the asset. Contract hire is a typical form of operating leasing, which usually includes other options such as maintenance and service and is often used for the leasing of cars and vans. Perhaps the most commonly known deal is hire purchase (HP), which arguably isn’t a leasing deal at all as you will end up buying the asset. This starts with a deposit and is followed by a series of payments to cover the capital and interest.

There are a number of ways to structure payments, buy options and additional services, and bespoke deals are available if you have a very specifi c need. However, from a tax point of view there are two basic types of deal and a third for long-term agreements.

All the taxman is concerned with is if ownership of the asset can pass to the lessee at the end of the deal. If it is not a part of the agreement that you can take ownership at any point, then your hiring deal is tax deductible from your profits. But if ownership can pass, it falls into the area of capital allowances.

“Where there is an agreement where title could pass, irrespective of whether it does or not, then you are entitled to capital allowances from the day you sign the agreement,” says Simon Littlejohns, a tax partner at accountants PKF.

“Therefore, this type of agreement provides immediate tax relief. If you are still paying this for a second year then the remaining balance will be used to calculate your allowances. You have got front-loading there which can be attractive.”

In the Budget 2006, the chancellor Gordon Brown made some changes to the law on capital allowances, which could be useful if you are planning a long-term agreement. In this instance, where the deal is for fi ve years or more you can now claim capital allowances, even if the ownership doesn’t pass, which could be useful for the lessees of more expensive kit.

So before you sign the deal, ensure you know what the options are on ownership. The potential impact on your tax position could make or break a deal.

WHEN SHOULD YOU LEASE?

“The most important thing to a rapidly growing business is that cash is king. Unless you have cash you are in danger of going out of business,” says Keith Sangwin, sales director at Barclays Asset Finance. Few would disagree with him. The main argument for leasing is the positive effect it can have on your cashflow. If you need to invest heavily in your business in order to grow, then spreading the payments is a smart move. With growth comes risk, so why risk everything all in one go? With leasing you can pay off the majority of the debt when your revenues have increased.

Jeff Leng, founder of Rise Technical Recruitment, needed to increase his offi ce space to cope with his business’ rapid expansion. Previously, the company had been in serviced offices but the facility had run out of room and he needed a solution. “We found a large 3,500ft space, enough to house 50 people, and refurbished it with glass partitions, a telecoms system, desks, chairs and a conference table,” explains Leng. “If we had bought everything outright it would have cost £70,000, however the leasing options meant that the costs were similar to our serviced offices.”

Rise now has enough space to continue growing, can offer a more pleasant environment to staff and is able to bring clients to an office with a modern look.

“Having a well-presented office is important in terms of having a good environment for staff and for our clients to visit. We have a pool table in the office and it is part of our ethos to try to make the company a place where our staff are happy,” adds Leng.

The obvious downside to leasing is that it will usually cost more than if you purchased the goods outright, as you will be paying interest on top of the capital. However, leasing can be a sensible option for expensive items that will restrict cashflow.

Virtually any asset you buy will depreciate in value very sharply in the first few years of its life, and some items will be virtually worthless by the end of their use. This is another reason why leasing can be useful. “One question which is worth asking is ‘what is the lifespan of the item you are buying’? If it is for three years then get a finance deal of that length,” says Barclays’ Sangwin. “There is no point paying for something longer than it is going to last for.”

Asset finance teams at banks can help you determine how long things such as plant machinery will last, although they won’t want to recommend what you should be buying. Other people worth talking to are your suppliers and accountants, particularly if they have other clients in a similar industry.

As mentioned, you are likely to consider leasing if your business is looking to expand. There is always risk associated with growth and large outlays of cash can be lost if plans do not work out. At least with leasing you will be able to return the goods early if your ambitions need to be reconfigured. There is possibly nothing more annoying than looking at expensive fully-owned items which you no longer need.

MAKING THE DEAL

Leasing deals can be made at the point of sale if the supplier has the facility. However, some manufacturers will only accept full payment upfront. In this instance you will have to get a bank or finance company to make the payment, then pay them back.

“The entrepreneur has a lot of choice when it comes to asset finance as all major banks offer it. Therefore it is well worth shopping around as you want to choose from as many providers as possible,” says Craig Pickering of the Finance and Leasing Association (FLA).

Indeed, looking at a list of members will give you an idea of how competitive the market is, and the majority of well-known lenders are part of the FLA.

When it comes to actually signing an agreement, the forms you need to fill out should be straightforward. Growing Business examined a form from Siemens Financial Services, concluding that you certainly shouldn’t need a lawyer to read it first. However, this doesn’t mean that you shouldn’t read it first.

As a general guide, it is recommended that you only deal with a member of the FLA – this should be printed on the bottom of the paperwork. FLA members are governed by a set of rules and conventions which should protect you from any kind of nefarious activity. Most banks and finance houses are members, but not all are – so check.

Before sealing the deal you will be subject to the same checks and profiling that are carried out whenever you apply for credit. If you are dealing with a financier you haven’t dealt with before then it is likely they will want to see a copy of your audited accounts, as well as reference materials that prove you are who you say you are. Some financiers might also wish to see managed accounts, especially if it is a big deal.

Once you have established precisely what you need and have provided the financier with the paperwork, the actual processing of a deal shouldn’t take long. Banks say they are usually able to provide the funding in 24 to 72 hours, so you won’t be waiting long.

WHAT ARE THE COSTS?

Prices can vary enormously from deal to deal with some going for as little as 1% over base and others adding up to 10% and more. Your profile will be taken into account and to some extent the amount you are borrowing is a deciding factor on rate as well. Typically, the larger the sum the lower the rate. Consolidation of all outstanding loans can be a good idea, but it might mean you end up paying extra interest.

Regardless of whether you deal with a bank, specialist provider or direct from the supplier, they are all businesses and are open to negotiation. As one financier told the magazine, they are more likely to offer a better deal to a company that is likely to need further finance facilities in the near future. Most lenders will want to get to know you and your business prior to the deal – so if you think you will need extra lending later on then let them know.

Although you will want to get the best rate, remember that interest charges aren’t the only cost you will be paying. It is always worth finding out about other costs such as set-up fees, maintenance costs, service charges and insurance. Remember that from a tax point of view there are two main types of deals. So again, consider options to buy and ensure that these figures are in your final consideration.

DEALING WITH SPEACIALIST PROVIDERS

If you have very specific needs there are players in the field that might prove useful in providing finance for one particular type of asset. IT is a good example of an area where a bespoke deal could prove highly beneficial, particularly if you are a web-based company or have big IT requirements.

Specialist IT providers, such as Syscap, will work with you to provide finance that will enable a company to keep its IT systems up to date. These providers won’t necessarily want to advise on who to buy from, but will be able to provide key information on the products available, the expected lifespan and the types of updates that will be required in the future. Specialists are already well-established in the motoring industry and are similarly useful if you have big transport requirements.

WHEN SHOULDN'T YOU LEASE 

If your business is cash rich (lucky you) then avoiding interest charges is one good reason to buy outright. There is also a certain simplicity to ownership which you don’t get from leasing – if you own something it is yours to do with as you please. Check very carefully on the terms of use of any leasing deal to make sure that you are not going to fall foul of the small print. What might seem inconsequential could be a breach of the agreement. For instance, sub-letting or even lending the equipment to another company tends to be outlawed by the agreement. You will also be under an obligation to keep the equipment at a stated property and, when reasonable, allow the lessor to inspect its property to ensure it is not being misused.

Bought goods are assets and can be borrowed against and sold off if need be. Leasing and hire agreements do not fall into these categories, so if you are used to operating in this way then you need to bear this in mind. All told, leasing’s surely got to be considered – but it’s not for everybody. The decision is yours.

Case study: When leasing makes sense

Name: Andrew Valentine

Company: Streetcar

Founded: 2004

Streetcar is a car rental business with a twist. Members are issued a swipe card and PIN number and simply pick up the nearest car to their location and pay-per-hour for its use. It makes the hire process a lot quicker, easier to access and is more fl exible for customers. However, for this to work the company needs a lot of cars. “Our business wouldn’t have been possible without leasing,” explains company founder Andrew Valentine. “Initially we started off with just eight cars which would have cost £100,000. We were doing something completely novel and all of the funders we approached said ‘great idea, come back when it works’. We talked to about 70 funders. Eventually we found one through a broker then gradually we were able to prove the concept worked. Now we have more than 300 vehicles and they would be valued at about £4m, so without a leasing arrangement we couldn’t have achieved our aims.”