Funding for SMEs - Leasing and Hire Purchase

22 Dec 11

There are a number of different sources of funding available for small and medium enterprises (SMEs). This article looks at two specific types of “asset backed” funding namely Leasing and Hire Purchase (HP).

Access to money in the SME market is certainly more challenging nowadays as banks have tightened their lending criteria. As a result many SMEs struggle to access money to run and expand their businesses.

Leasing and Hire Purchase is still readily available in the SME sector. With Leasing and HP you can acquire most types of equipment, machinery, IT and vehicles. Attractions include:

Fixed repayments – generally repayments are fixed and do not change even if interest rates rise. This provides more accurate budgeting.
Quick decisions – facilities can normally be agreed within 48 hours giving you the ability to negotiate the best deal from your supplier and take delivery quickly.
Security – normally the only security required is the asset being financed, leaving other security free for your bank or other cash flow funders.
Tax efficient – there are attractive tax incentives with these facilities which we discuss below

The key differences between Leasing and HP contracts are:

Leasing	Hire Purchase
Deposits – normally only a month’s payment is required but larger deposits can be paid if preferred.	Deposits – deposits range between a month’s payment to a percentage of the cost price (normally starting at 10%) depending on the HP company’s assessment of your company’s financial strength.
VAT – is paid on each payment as it falls due. All VAT payments can be claimed back subject to the client being registered for VAT. For cars only 50% of the VAT is recoverable.	VAT – the full VAT is payable with the deposit. This can be claimed back in the quarter that the deposit is paid, for VAT registered companies.
Tax Treatment – all rentals paid during the repayment period will be deductible against taxable profits. Car Leasing tax treatment is more complex and our Tax department can provide more information.	Tax Treatment – Until April 2012 Hire Purchase contracts attract 100% capital allowances on an annual spend of up to £100,000. Purchases in excess of this amount are written off at 20%. From April 2012 this will be capped at £25,000 and purchases in excess of this amount will be written off at 18% per annum.
End of Contract – be careful as some leases roll over into secondary periods and rentals may continue to be collected by the funder. Preferably ask for a Fixed Term agreement as this crystallises at the end of the contract. Ownership is not guaranteed with lease contracts so ensure you enquire what the procedure is to gain title and the costs involved. It’s always best to arrange this at the start of the contract.	End of Contract – Hire Purchase has an option fee added to the last payment that automatically transfers title to the client.

Note:
There is a facility known as Lease Purchase which is basically a hybrid model using a Lease payment profile (e.g. 1 +35 months) but where the VAT is paid in full up front. Lease Purchase is in fact a Hire Purchase transaction.
Quite often brokers and suppliers of equipment refer to Lease transactions as ‘Lease Purchase’ which is misleading and incorrect. This could have an adverse effect on your capital allowances and there is no guarantee of owning the asset at the end of the contract. As ever, always read the small print!

Leasing and Hire Purchase are useful products that can provide you with additional funding, however always make sure you know what you are signing.

CLB Coopers advises a number of SME’s on funding arrangements including Leasing and Hire Purchase. We have a network of contacts who we can talk to on your behalf to arrange financing for your business with your success and growth at the forefront of any discussion.

For more information on the above or to discuss other funding options contact Mark Worsley on 01204 551100.