Whether you are looking for an IT infrastructure upgrade or you require new machinery, you know how important assets are to sustaining future business growth. But which financial funding option is right for you? Should you purchase outright? Borrow from the bank? Or perhaps you should consider asset finance? In this quick guide, we cover the four main funding options, as well as their advantages and disadvantages, so you can decide which funding option is right for your organisation.
Purchase your assets outright
By purchasing an asset using cash, you can take ownership of the asset immediately. Because you own the asset outright, you can claim capital allowances too, a distinct advantage. However, most businesses cannot truly afford this. Consider this, you are likely to own an asset that will most probably depreciate over time, it will potentially put a significant drain on your working capital and you will have to maintain and insure the asset yourself.
Bank borrowing is suitable for any form of business asset (including land or property), and you will own the asset in full from day one. You will need to make regular payments on a loan or cover the cost through normal cash flow spread over an agreed term. You may be asked to make some contributions towards the purchase price and the repayment schedule will depend on a number of factors, the amount of money borrowed, interest rate, loan duration…etc.
Using this method of financial funding, you can claim capital allowances and the interest element is 100% tax allowable. However, the bank is likely to want additional security from your company in support of the advance. You must also remember that bank facilities, such as overdrafts, are often repayable on demand.
Asset Finance – Hire Purchase
This is an ideal financial solution if you are looking at business assets that have a medium to long life span. By spreading the cost over an agreed term, hire purchase eventually enables you to secure ownership of the asset. Payments can be customised to suit business needs (i.e. seasonal) and the finance company will retain the title of the asset until it is paid for in full.
Some other benefits include your right to claim the capital allowances, the interest of the repayment can be deducted from taxable profits as a trading expense and hire purchase is not repayable on demand.
Asset Finance – Leasing
Leasing is a good option for short to medium life assets that need regular updating or will be used for a period less than its full working life. You pay a rental over an agreed period and there will be a usage agreement between the two parties. You will never own the asset, though you will have full use of it while you are leasing the asset.
There are two types of leasing options available to you, finance leasing and operating leasing. While you won’t be able to claim capital allowances (the leasing party does this and takes it into account when calculating your rentals), your rental payments generally can be treated as a revenue expense. There are fully allowable against taxable profit.
So there are the four funding options for you to consider. We know that if you are considering financing options, there are a myriad of questions that you need answers to. That’s why you need to look for a total solution provider that can offer you informed advice, expertise and specialist knowledge in your industry. Which is where we come in.
Download our Management Guide to Asset & Structured Finance to see how we could help you define what you need from a financial perspective.