Why Do Businesses Use Asset Finance

Tuesday 13 October 2020

So Why Do People Use Asset Finance for Interior Projects?

This might be the question you ask yourself if you’ve never used any form of asset finance before or, perhaps, if you are examining your options prior to making a new investment.  Office fitout and new furniture will make up the bulk of any capital outlay when looking to secure a new leased office premises.

Moving office Lonoon

The answer is, well... it depends.

The truth is that there are as many reasons for choosing to use finance as there are different projects you can use it for. The motivations vary depending on a host of factors including, but not limited to, the type of organisation you are, your financial position, your available capital (and broader demands on it), your future plans and obviously the assets themselves. 

Office Fitout in London

[1] Tax

Probably one of the most misunderstood reasons but certainly one of the most popular. In essence, during the term of a finance lease, technically, the bank owns the asset. It is this feature of a finance lease that allows all of the repayments (both the capital and the interest) to be treated as fully (100%) tax deductible. Equivalent cash purchases typically only deliver partial tax relief through the system of capital allowances and, where they qualify, enhanced capital allowances (ECA).

[2] Budgets

Whatever the size or shape of your organisation and project, undoubtedly when you do look to invest, you will be forced to consider available budget. Budgets are there for a reason of course and living within your means is as powerful a philosophy in business as it is in life.

By spreading your costs over the useful life of the assets you are investing in, the demands on budget fall away (for many this turns a capital expense into an operating one) and with low, fixed payments you can deliver the project you want, without compromise, and one that maximises the benefits for all your stakeholders.

[3] Spreading Costs

Unless you are investing in, let’s say, vintage cars, premium wine or works of art, it is a sad fact that the assets you are buying will depreciate from day one. What’s more, in the vast majority of cases, they will only return value over time too.

When you consider that using capital sees you paying upfront and in full, it is not surprising that many people are switching on to the idea of spreading their costs in line with the return on investment over time.  This is essentially what a finance agreement gives you - the ability to spread your costs over time as you ‘use’ the assets.

[4] Strategic Choice

Asset finance takes the pain of that experience away and ensures that your organisation always has the latest technology, equipment, infrastructure or environment to give you an edge in your market. For a fixed, low amount each month (or quarter/annum to suit you) you never have to face large spikes in demands on cash flow again or face the prospect of limping along with creaky old equipment or a tired old office space. Once the agreement comes to an end, you simply enter into a new agreement for brand new assets and the cycle repeats itself.

[5] Opportunity Cost

Sinking capital into assets that depreciate from day one and only return value over time is very much questionable when it comes to determining the best use for your cash. The cash deployed is locked away and unavailable for other uses.

Finance teams understand the importance of Return on Capital Employed (ROCE) and so freeing up capital to be put to work generating greater profitability can be highly beneficial for them.

[6] VAT

The impact of VAT, particularly for larger interior projects, can be a serious consideration with regards to cashflow for some businesses. Although most will be able to reclaim the VAT, depending on the timing of the project, businesses will face (typically) up to three months exposure until they complete their next VAT return.

Most forms of leasing (excluding Hire Purchase) allow the VAT to be spread throughout the entire term of the agreement with the VAT due only on the amount of each repayment. This helps cashflow for all but is particularly powerful for those who cannot reclaim VAT, softening the impact of that for any large project they are considering.

If you would like to learn more about how asset finance can help you, please get in touch and we will be glad to referrer you to Josh and his team at Bluestone.



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