Hazel Jacques, director at asset finance specialist Academy Leasing, considers the different funding options available to PSPs kicking off 2016 in expansion mode.
Printing businesses face challenging times ahead, with the latest Market Update report from Key Note warning that the industry appears to be in a long-term downward economic spiral, following a sales slump of 3.1% in 2014. That’s the type of message banks get, so how do you persuade them to lend you the money to expand? Perhaps you don’t – there are alternatives. Here’s a look at the different funding options.
1. Leasing lowdown?
According to the Printing Market Research Report by IBISWorld, there are more than 9,500 print businesses in the UK, so it’s obvious that to remain competitive continual investment in new equipment is essential. But if banks won’t fund you, or their rates are just too onerous, leasing assets might be the best route.
Leasing is effectively a fixed or minimum term rental where the leasing company buys the asset on behalf of the customer and agrees to lease it back to them for a specified period of time. At the end of the minimum term, the customer can return the equipment, continue to use it or upgrade it to a more advanced piece of apparatus.
In terms of interest, it depends entirely on the previous and current financial situation of the borrower. If the company is a long-standing print company with a good credit history and a proven track record with payments, the interest will be less than that of a new start-up with no financial history, which ultimately carries a greater risk.
2. Why lease if I can buy?
Leasing requires a minimal deposit, or sometimes no deposit at all, and allows the cost of the asset to be spread across regular payments. When it comes to leasing equipment, payment plans can be tailored to suit each individual customer. Usually, the maximum payment period is five years.
These timely payments to the lender can also help your company build up a strong credit history.
In addition, there are also tax advantages to be had. Capital allowances on the leased equipment can be claimed and interest on the finance payments is tax deductible. If the asset is hired under an operating lease, you can also write off the total amount of your leasing agreement against corporation tax by using Operational Expenditure (OPEX).
3. Do I own the kit?
In essence, you don’t ‘own’ any of the equipment during the lease agreement. There is, however, a chance to take ownership at the end of the fixed term after all the payments have been made. All finance leases give the opportunity to take ‘indefinite possession’ after the initial period has ended.
4. Which lender?
There are lenders with experience and in-depth knowledge of the print sector. These will be able to recognise the potential returns-on-investment a piece of equipment can generate, making them more likely to provide approval for funding. They will also be able to offer trustworthy and unbiased advice on which suppliers and assets are the most reliable.
Approaching an asset finance company that isn’t simply a broker for a panel of funders, but that can fund projects from its own reserves, can also prove a shrewd move. Not only will these lenders have greater decision-making flexibility, there are invariably fewer delays in advancing money. An agreement to lend can be made one day, with new equipment in situ in your business the next.
5. What if cashflow is at breaking point?
Unexpected incidents do crop up that require unplanned financial outgoings. In such cases, your existing hard assets which have a clearly monetary value, can be borrowed against to release working capital and boost the company’s cashflow.
The finance specialist will evaluate the equipment to ensure a fair cost is received for the asset, while also considering any other outstanding debts the company may have. This is to check if the firm can adequately cover the new loan terms and conditions. The business owner’s individual financial situation will also be considered as a further guarantee of their capability to pay back the debt.
Demonstrating a sensible business plan to the lender, such as providing proof of realistic sales forecasts, detailed competitor research and demands for the service in the area, can encourage the specialist to loan money without the need for further securities.
If the equipment in question is already subject to existing finance terms, the lender will look to spread the payments over a longer term, reducing monthly outgoings and providing more financial flexibility.
6. Can I benefit from tax relief?
Tax relief is available on some or part of the payments you make, depending on the type of lease agreement.
If you are purchasing equipment outright or on a hire purchase agreement, note that the Annual Investment Allowance (AIA) - which offers tax relief at 100% on qualifying expenditure in the year of purchase, deductible from taxable profits - fell from £500,000 to £200,000 on 1 January this year, reducing the tax relief cap on investments in equipment and development capital.
For businesses that have accounting periods that straddle 1 January 2016, the AIA will combine both the existing and new limits. A company with a 31 March year-end, for example, will have an allowance of £425,000 (£500,000 x 9/12ths + £200,000 x 3/12ths).
From 1 January 2016 to year-end however, the AIA only extends to the calculated allowance for this period.
7. What about invoice discounting and factoring?
There may be times when you need to improve cashflow - eg. when a large customer is late with payment yet you require a constant stream of money for consumables etc. Here invoice discounting or factoring can be useful as they provide a business with access to funds tied up in unpaid invoices.
While both are similar, the difference between the two lies with who takes control of the sales ledger and chases the invoices. Invoice discounting involves the company maintaining responsibility for payment chasing, credit control and invoice processing, but having a financier lend money (usually around 80 - 90% of the total value) against unpaid accounts. Clients will not be aware of any attachment with a financing organisation.
Alternatively, invoice factoring is a completely outsourced credit control and collection service. Like with discounting, the factoring company will provide a cashflow advance but they will take charge of chasing clients to settle outstanding invoices.
8. What about acquisition funding?
Funding for a takeover could come from acquiring a company’s debts, hard assets or even soft assets such as the phone system. The whole process is two-fold, with the purchasing company having to first find the finance to fund the acquisition, and then, secondly, secure sufficient working capital to run the business.