Magazine - Finance and the Turfcare industry:

By John Morrison in Finance on 25th Mar 2007 16:00

This article appeared in Pitchcare Magazine
Issue 11 - February / March 2007

Finance and the Turfcare industry:

• What does the terminology mean?

• Who should I use for financing equipment?

• What are the different options of finance available?

• What benefits do they give to my business?

Over this and subsequent editions of Pitchcare we will try to answer these questions. So, let's start with the basics as there is a fair amount of understandable confusion. This article looks at the main finance products, their features and general benefits.

A little boring? YES! But stick with it, understand the basics and future editions will look at the more interesting aspects of what is available and which is the "best" for your business with some real examples.

Finance Products:

Typical of most industries the finance sector has its own terminology and variations on a theme for most of its products. We will look at the main finance products used to enable you to acquire equipment, "Leasing" and "Hire Purchase".

1. Leasing:

• You borrow money to gain use, not ownership, of equipment.

• The monies are repaid over a defined period of time by an agreed rental.

• Legal ownership remains with the funder.

• Taxable allowances and balance sheet treatment vary with lease type.

• At the end of the term you will be given options varying with lease type.

a) Finance Lease:

• Rentals are calculated on the full amount borrowed over a fixed period of time.

• The VAT is spread over the rentals.

• The tax ownership is with the funder so you cannot claim any allowances against your taxable profits.

• However, the interest element of your rentals can be treated as a business expense against taxable profits.

• The equipment value shows on your balance sheet as an Asset and the rental total as a liability.

At end of the finance term you will usually have 3 options:

i) extend the rentals at a nominal annual rental
ii) sell as the funder's agent retaining the majority (90%+)of the sale proceeds
iii) return the equipment.

Benefits:

• fixed rentals from day 1 = ease of budgeting

• protects against inflation or interest rate increases

• VAT not payable in advance but spread over rentals

• Interest element allowable as a business expense

• leaves your cash in your business so improves cash flow

b) Operating Lease: a future value is placed on the equipment anticipated at end of the finance agreement and the rentals are calculated on the amount borrowed less this "residual value", meaning the rentals will be lower than normal finance. A third party will take the risk in the equipment being worth the residual value.

• Operating Lease does not show on your Balance Sheet.

• You cannot claim tax allowances on the equipment.

• However, you can treat the total rental amounts as a business expense against taxable profits each year of the agreement.

At end of finance term you can:

• extend the term at a rental to be agreed with the funder

• return the equipment in reasonable condition or purchase it from the funder at a "fair market value".
  

Benefits:

• lower rentals = improved cash flow

• leaves your cash in your business

• pay for use not ownership

• fixed rentals from day 1 = ease of budgeting

• protects against inflation or interest rate increases

• VAT spread over rentals

• usually off-balance sheet so improves "ratios"

• 100% of rentals allowable as a business expense

• flexible options at end of agreement term

• no risk in the future value of the equipment

c) Contract Hire: almost identical to Operating Lease. The difference is that the supplier will also provide maintenance/service of the equipment with the cost as one fixed sum collected as a total rental.

Benefits:

• exactly as per Operating Lease above

• plus: known fixed total costs for using equipment and no surprises!

2. Hire Purchase:

(a fairly standard product although you may see it called "Lease Purchase" or "Deferred Purchase")

• You borrow money to buy equipment.

• The monies are repaid over a defined period of time by an agreed rental at the end of which legal ownership passes to you..

• The tax ownership remains with you.

• The equipment value shows on your balance sheet as an Asset and the HP rental total as a liability.

Benefits:

• fixed rentals from day 1 = ease of budgeting

• leaves your cash in your business

• protects against inflation or interest rate increases

• VAT fully reclaimable

• Tax allowances through Writing Down Allowances (25% pa)

• Interest element allowable as a business expense

• ownership is yours at end of agreement term

• leaves your cash in your business so improves cash flow

Legislation:

Let's not dwell on this as it would be an article in itself! The key legislation is the "Consumer Credit Act" (CCA) which regulates finance agreements up to £25,000 with individuals / sole traders / partnerships.The Act is extensive and is designed to give maximum protection to the "Consumer" and so anyone offering such finance must have a CCA License, be careful if they do not!

Next Editions:

We will be looking at:

Repayment structures: within the products themselves there are a significant number of ways to vary the repayment schedules to match your business needs. What do they mean and examples of how they can help?

Fixed Interest Rate or Variable: the options and benefits.

Manufacturer Schemes: many suppliers of equipment will use special, usually low rate finance schemes to promote product sales such as new model launches. Usually these are an excellent option and preferential not only to other forms of finance e.g. your own bank but also to using your own money.
Your choice: Please let us know if you have any specific issues you would like addressed .

Any questions? Want assistance now? Can't wait for the next edition!?
Please phone my Head Office on 01560 482911 and we will arrange for local contact from one of our 25+ Regional Directors.

John Morrison: John is the Director, Major Accounts of First Independent Finance Limited, one of the largest independent finance intermediaries in the UK, see www.f-I-f.co.uk

Read more articles in Finance, by John Morrison or from March 2007.

Read more articles from Issue 11 - February / March 2007