10 things to consider when applying for finance

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For those who are considering perhaps upgrading or replacing equipment in the New Year and how to finance it, we have put together a list of 10 questions you might want to think about before you take the plunge.

1.       WHAT ARE THE REPAYMENTS AND CAN YOU AFFORD THEM? This is a straight forward question – does your cash flow allow for these payments or will the item being financed generate sufficient revenue to pay for itself? However, circumstances can change in a business, perhaps with increased competition or the loss of a customer, both of which can affect the cash flow.  It is also worth remembering that should the equipment break down you will still have to make the agreed payments while it is being repaired.

2.       ASK WHETHER PAYMENTS ARE FIXED OR WHETHER THEY CAB BE CHANGED. If you choose finance where the interest rate is variable, payments can change with rates’ rise or fall. Although it rarely happens there is the possibility that VAT rates could be changed which would affect your repayments if your agreement includes paying the VAT monthly.

 3.       FIND OUT WHAT THE TOTAL DEPOSIT IS whether it is a lump sum or a percentage of the asset’s value or a multiple of the normal repayment (could be the equivalent to 3 or 6 monthly payments). Are there any fees payable with the deposit?

 4.       HOW IS VAT TREATED IN THE FINANCE AGREEMENT? This is more of an issue for businesses not registered for VAT. With a purchase agreement you have to pay the total VAT up front but with leasing you pay the VAT as you go along. If you are VAT registered, you could also explore whether a VAT deferral is available whereby paying the VAT can be delayed for up to 3 months.

 5.       DO YOU WANT TO OWN THE ASSET AT THE END OF THE FINANCE AGREEMENT? If, for example, your business is in a competitive sector where technological change is fast-moving, owning the asset at the end of the agreement may not be required as it will need to be upgraded to the latest equipment at this point in which case a lease agreement might be preferable. Where an asset will outlast the agreement, purchase would probably be the better option.   

6.       WHAT IS THE USEFUL LIFE OF THE ASSET? This question has a bearing the length of the finance term  for the asset you are considering. Plainly if the asset will only last for two years, the financial terms of the agreement need to reflect that, and you would not take out a 5-year term.

 7.       WILL THE LENDER REQUIRE ADDITIONAL SECURITY? Some lenders may make agreements conditional on the provision of a director’s guarantee.  If so, you may be asked to engage a solicitor to explain the obligations you are signing up to and have them confirm to the lender that they have done so. It is also important to check whether the Director’s guarantee is limited to the lifetime of the finance agreement or does it continue indefinitely.

 8.       ARE THERE ANY TAX ADVANTAGES TO BUYING RATHER THAN LEASING? Your advisor may be able to help you to access any Government incentives that may be available and what, if any, additional tax allowances might be applicable, which is often the case with the purchase of a piece of equipment.

 9.       ARE THERE ANY GRANTS AVAILABLE TO PURCHASE EQUIPMENT? For some business sectors, especially in regions where the economy is in need of more businesses perhaps to increase job availability, or to stimulate new industries, there may be grants available to help with the finance.  The local LEP is a good source of information about what is available.  It is certainly a question to consider.

 10.   AND FINALLY, when considering the terms of any finance agreement you should ask whether it is possible to settle early.  If your circumstances change so that you are you able to pay off an agreement before the end date are you able to and if so what penalty, if any, would you incur?