Hire Purchase or Operating Lease What’s the Best Option?
Across the manufacturing and engineering sector, vehicles and machinery are critical for logistics, site operations, and service delivery across the business.
B ut these businesses are also issue. With decisions affecting not only cash flow and tax planning but also operational agility and long-term asset management. In this article, Ben Cussons, Business Advisory Partner explores the different options for asset financing, and what to consider when it comes to making a choice for your business. As with many things, there’s no right answer for everyone here, there are pros and cons to each route. But to begin with there are some considerations you might want to think about before you start: typically very capital-intensive, with assets holding a significant balance sheet presence in accounts, making asset financing a strategic How often are the assets going to be used? And what’s their average lifespan? High-usage fleets may wear out faster, affecting residual value. What’s your cash flow like? You may have capital available or predictable revenue streams. What’s the operational flexibility of the different types of purchase? What happens if you need to scale the fleet up or down quickly? How long will the technology last? Specialist or tech-heavy assets can become obsolete much quicker.
Purchase – Outright or Hire Purchase
Buying an asset on finance means you spread the cost over a period of time and the asset will belong to you at the end of the repayment period. You can also claim the VAT back up front, plus there’s up to 25% in Corporation Tax reduction from day one, depending on your tax rates and where tax profits fall within the financial year. The asset will appear on your balance sheet as an asset (together with any associated acquisition costs), and because the HP finance is linked to the asset, it may be easier to source funding. At the end of the payment plan you will own the asset, to either keep using or sell on second hand. However, you should bear in mind that there may be limits as to what you can afford. As well as putting a deposit down - which at the very minimum will be the entire VAT value of the acquisition - the cost of servicing the debt may be difficult to maintain when other costs and revenues in your business may be fluctuating. Repayments will be over a set period, potentially longer than on a lease, adding a lot more debt to your balance sheet. Remember that buying outright will mean the responsibility of maintaining and servicing the asset is down to you, and the risks of dealing with expensive repairs will need to be factored in. Furthermore, you need to consider the impact of your current ratio which will be worsened by the addition of debt (an element of which will be a current liability). This is important for those businesses with borrowings that have financial covenants attached.
Pros:
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Immediate Corporation Tax saving in the year of purchase based on 25% of the total costs of the asset, irrespective of whether you purchase outright or on finance.
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100% of the VAT can be reclaimed on the cost of the asset.
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Shown as an asset of the company which strengthens the balance sheet.
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Once paid for the asset is yours and there is no immediate commitment to replace the asset, any future earnings out of the asset are yours.
Cons:
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Requires initial outlay of cash by way of the deposit and funding of the VAT upfront. Significant liabilities used to borrow the money to finance the purchase of the asset may compromise raising additional finance. You are responsible for the ongoing maintenance costs and as the asset’s future life shortens - these are likely to increase.
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Ultimately each option will have a different impact on your balance sheet too.
1 0 | SCRUTTON BLAND | MANUFACTURING A N D ENGINEERING
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