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.

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.”