Why Do People Use Asset Finance To Fund Their Projects?

Why Do People Use Asset Finance To Fund Their 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.

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.

“The Big Six”

Steve Russell, Sales Director at Bluestone Leasing is ideally placed to explain the motivations behind why so many companies turn to asset finance:  “After arranging tens of thousands of agreements over the past 23+ years for organisations of all sizes, as a finance partner to Opus4, Bluestone Leasing is well placed to identify the key drivers. We call them the ‘Big Six’.”

[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).

Although obviously not relevant to public sector organisations (such as NHS, education, government for example) that don’t pay tax, it can be a game changer for profitable, private companies subject to corporation tax or income tax as in the case of partnerships and sole traders.

The equation has become somewhat more nuanced over recent years after the introduction, by government, of the Annual Investment Allowance (AIA) in 2008 which, subject to certain caveats, does provide businesses with the equivalent of 100% tax relief on qualifying investments up to a set threshold each year, even when using capital.

That said, as many costs in a project simply don’t qualify for AIA and/or the business has used up its allowance for the year elsewhere, finance remains a great way to maximise tax efficiency for many companies.

[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.

That said, budgets can be artificially restrictive and potentially quite damaging to the aspirations of any organisation. Traditionally there are only three solutions when what you want to achieve doesn’t quite match your available budget.

(i) Lower your aim

Trim down your requirements to match your available capital. The result can often mean compromising on the scope, quality and, ultimately, the outcome of your project.

(ii) Deliver it piecemeal

Do what you can now and wait until your next budget or when you have more budget available to do the rest.

(iii) Scrap it

Don’t go ahead at all. For some projects this is the only way forward as they can’t be massaged to fit into a smaller pot.

Luckily there is a fourth option – use finance.

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. We have already seen a huge rise in the concept or subscription and consumption models, particularly in the technology sector where “X as a Service” (just replace ‘X’ with whatever goods, software or service happens to be the case) is extremely popular. 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

This ability to spread costs over time offers a number of strategic and asset lifecycle benefits above and beyond using capital. Often in business we ‘sweat’ an asset for as long as we can – eking every last drop of value out of it until, usually, it either fails or becomes too costly to keeping going and we are then faced with having to spend a significant amount (often that we have not budgeted for) typically in a hurry so that our business is not affected.

Asset finance takes the pain of that experience away and ensures that your organisation always has the latest technology, equipment, infrastructure 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. 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.

When we look at the 10,000 customers we work with, it might surprise you to know that a good proportion of them are large, profitable and cash-rich organisations. Thinking about it a little deeper however, it does make sense.

Unlike those that need finance because they don’t have the available capital, many of which will have challenging credit profiles, these businesses have strong financials and attract the best rates and commercial terms. Furthermore, they recognise that they can make their cash reserves work harder for them by deploying their capital where it will make greater returns – that could be staff, sales, marketing campaigns, online and web presence to name just a few.

Most in finance will know the Return on Capital Employed (ROCE) figure for their business so freeing up capital to be put to work generating greater profitability can be highly beneficial.

[6] VAT

The impact of VAT, particularly for larger 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.

The situation is even more acute for those organisations, such as most charities and other voluntary bodies, which are unable to reclaim VAT at all.

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.

So That’s Why!

Indeed it is, or at least it is for some. As pointed out at the beginning, these are just some of the drivers behind organisations turning to asset finance as a way of funding a whole range of their investments. There are a myriad of other reasons too but what we can be certain of is that, as evidenced by the double-digit growth in the industry, year-on-year, asset finance has never been more popular for businesses of all sizes, in all sectors and for just about any project you can imagine.

If you liked this blog, check out our Finance Your Project page and take a look at some of our latest videos and some of our workplace services that you might be requiring finance for:

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