Choosing the right finance for your business


Finance is one of the most important considerations when starting a new business or planning to enlarge an existing one.

You need to be sure that your business will be resilient enough to be able to meet the increased liabilities but equally it is important to not borrow more than your projections suggest that the business needs to operate at near-full capacity.

There are many finance options and it can be difficult to know the right one to choose when you need equipment or vehicles for your operation.

The two most common asset finance choices are Hire Purchase or a Finance Lease.

Hire Purchase

Hire Purchase (or HP) is one of the oldest forms of asset finance.  With HP you pay a deposit, then monthly payments for the agreed period at the end of which the asset is your property.

The deposit is usually a percentage of the purchase price plus all the VAT, where applicable, and the repayment periods are typically in the range of two to five years, although sometimes, particularly with larger and more costly assets, the HP period can be longer.

HP is typically used for the purchase of machinery and vehicles, or any other physical asset where there will be a residual value after the end of the borrowing period.

Finance lease

With a finance lease, you are paying for the use of a piece of equipment, but you will never actually own it.  It is often used for items such as office equipment. 

With this type of finance, you pay the VAT on each payment as it falls due rather than at the outset as with HP.

The initial payment can be a percentage deposit or, more usually, a number of monthly payments.

While there is no ownership at the end, lessees do have an interest in the assets as they receive a percentage of what the asset is sold for; typically between 90% and 99%.

Of course, lessees could carry on leasing on a secondary/peppercorn rental which is usually equivalent to one monthly payment paid annually in advance.

What about operating costs?

There are times in a business where there is a cash flow problem, sometimes because the business has an increase in orders but not quite enough to cover the materials costs.

If you cannot raise money on an asset your business already owns the options for finance include invoice discounting, where a business can get an advance on its orders. Another possibility is a commercial loan either from the bank or from a specialist finance provider.

It may be better to go to a specialist lender for a commercial loan if the conditions the bank imposes are likely to prove difficult or impinge on other lending, such as an overdraft. The specialist lender will also impose conditions, most usually in the form of a Directors’ Guarantee, something we have covered in another blog.

Choosing the best finance option for your business can be a challenge and it can be helpful to talk things through with an adviser who can give you an objective assessment.