We’ve lived in a culture of credit for decades. Yet, we have very polarised views about the things we think should or shouldn’t be financed. Businesses will readily lease cars, vans, phones, managed print solutions and IT equipment. But when it comes to a fit-out or refurbishment project, business owners seem to prefer the traditional up-front outlay, rather than asset finance.
There are advantages and drawbacks to both options and the solution is very much dependent on the circumstances and outlooks of each individual business. We take a look at the benefits and drawbacks of each, to help you decide which might be best for you.
1) The Case for Asset Finance
Stay Cash Rich
If you lease rather than own the building you occupy, it makes more sense to roll the cost of your fit-out and furniture into a monthly outgoing, rather than pay a significant up-front cost into enhancing a building asset that you don’t own.
Even if a business is ‘cash rich’, it can be more prudent for a business to retain their cash position for cashflow purposes or indeed, investment opportunities that can generate more wealth.
In much the same way that cars, vans, and IT equipment are depreciating assets, the material parts of a fit out, including the office furniture, also depreciate in value. John Paul Getty is credited with the quote: ‘If it appreciates, buy it; if it depreciates, lease it.’ Whilst the financial value of the fit-out depreciates, the tangible value – the actual benefit it can bring to your business – goes up.
It’s Tax Efficient
Lease payments are allowable against taxable profit. Your lease rental payments are 100% tax deductible against profits, making leasing the most tax efficient way of paying for your fit out project.
Better Financial Management
Having the same, fixed, low monthly outgoings each month allow you to plan your budgets and forecasts more accurately. It avoids any hidden surprises, such as interest rate hikes and enables you to ‘pay as you earn’.
Get The Project You Want, Without Compromise
Depending on your circumstances, it’s possible that your ideal workspace solution is financially out of reach from a capital outlay perspective. Most companies who have a sum of money budgeted for their project, often have to compromise and make reductions to the proposed specification.
With a greater emphasis being placed on attracting and retaining talent, the workplace is now seen as a key investment in keeping people happy, engaged and motivated. Getting the project right, and investing in a space which can improve productivity and wellbeing can generate significant returns on the initial investment
2. Traditional Capital Purchase
If You Have The Resource, Use It
If a business has the money in the bank, it will always be a compelling argument to clear a debt up-front. You know where you stand, it protects your business from being financially exposed and tax benefits aside, you will always pay less, by avoiding interest.
There May Still Be Tax Benefits
If you’re looking to purchase a commercial property or already own one, there’s a chance you may be eligible for tax relief in the form of unclaimed capital tax allowances. Capital allowance tax relief offsets the hidden expenditure within a building. Typically, this would include heating, ventilation, electrical wiring and alarm systems. The allowances can only be claimed once, but many business owners remain oblivious to the fact they may be eligible for tax relief.
Protect Your Asset
If you own your building rather than lease all or part of it, you are enhancing it and possibly increasing its value. In the same way that tax allowances can offset the interest you pay, the increase in the building’s value can subsidise the capital outlay, meaning you have an appreciating asset which is fully paid for.
You Have Ultimate Control Over What You Own
There is peace of mind which comes with full ownership. If you have the resource, and you’re unlikely to need additional funds over the equivalent lease period, then being free of any financial obligations or ongoing commitments can be very appealing.
It’s clear there’s a lot to think about when it comes to paying for your project. Much will depend on your financial position, on the cost of the proposed work, and whether you’re buying or leasing the building you’re moving to.
However, the societal culture-shift towards finance and spreading payments makes perfect sense when it comes to funding fit-out and refurbishment projects.
At a time when businesses are under pressure to provide first class facilities to attract candidates and motivate staff, project budgets are rising. Leasing allows you to retain capital within the business, match your costs in-line with the return on your investment and give you greater control on your finances.
If you have a forthcoming project and would like to learn more about your financial options, get in touch.