Paying upfront for equipment and assets can be a significant drain on the working capital of most businesses, especially those that are expanding. Raising finance for new business equipment, software and machinery continues to be a challenging issue for companies, particularly SMEs and start-ups. With bank lending figures still falling, many businesses are turning to alternative sources of funding such as asset finance and leasing.
Asset Finance is now the third most common source of finance for businesses, after bank overdrafts and loans. It is also of growing importance in the public sector. In fact, organisations across every market sector are benefiting from leasing, from new start-up businesses to large established companies. With highly competitive interest rates and agreements, there is no doubt that leasing can offer an advantageous alternative to buying.
When you enter a lease agreement, the contract is between your business and the leasing company. Simply select the equipment you require and agree the price with your chosen supplier. A lease agreement is then drawn up by the leasing company. Once the lease documents have been signed and returned, arrangements will be made for the supplier to deliver the equipment. On receipt, you sign a ‘certificate of acceptance’, which effectively states that you have received and are happy with the equipment. The leasing company then pays the supplier. You pay the leasing company (the lessor) a regular rental payment, typically across two to five years.
Leasing can help improve your cash flow by keeping your working capital free. This leaves you with funds available to reinvest elsewhere in your business and you can benefit from tax efficiencies.
Using a leasing scheme, businesses enjoy the obvious volume advantages of ordering equipment in bulk, but without the disadvantage of having to pay for each purchase upfront. In addition, many businesses find leasing advantageous from a budgeting standpoint, as switching from outright purchase to a lease agreement changes how the equipment is accounted for.
For a small initial payment, the asset you require is yours to use straightaway. Leasing enables you to pay for the equipment you need over a fixed period of time, which helps you spread the cost over the life of the equipment and budget effectively.
Agreements can be over an agreed period, for example two years, and repayments can be made monthly, quarterly or annually, by direct debit or invoice, whichever is most convenient. Lease payments can even be tailored to match your seasonal cash flow.
Leasing offers the flexibility to acquire the latest equipment your business requires straight away or quickly respond to an opportunity in the market. It prevents having to delay the implementation of plans until sufficient funds become available, enabling new technology to be adopted instantly and providing continuity through a clearly defined plan. Businesses can upgrade or expand their resources easily, as and when the need arises.
With an operating lease, lease ‘rental’ payments are an allowable business expense that can be set against profit – thereby potentially reducing your tax bill. Other methods of equipment acquisition, such as outright purchase, do not have the same level of tax benefit.
With leasing you have a fixed interest rate. This protects you against interest rate rises and enables you to plan your budget effectively. As inflation rises, because your payments are fixed, the cost of the equipment reduces in real terms.
Please download the full WestWon guide where, you will find what you need to know about the benefits of leasing, the process, the options available, the things to consider and questions to ask when choosing a leasing company.