Leasing / Operating Lease
I talk to customers each week about the numerous challenges they face in pursuit of managing and growing their businesses. Amongst the many challenges they face, are the decisions they make as to how best to finance their capital expenditure requirements.
The decision to pay cash, hire purchase or use a lease facility is interesting. Some customers have commented that they choose HP because "it's the way we have always done things". Others comment that "we like to own our assets at the end of the finance term", and some make a habit of using lease options to take advantage of their tax position and maximise these benefits. There are no right and wrongs with these decisions.
Our leasing options provide customers with an opportunity to remove concerns around future values of assets, disposal routes, cashflow as well as tax benefits where relevant.
A key question to ask is "why do I want to own depreciating assets?" Cars, plant & machinery & IT are but a few of the assets we finance. Which of these retain their value at the end of the typical 3, 5 or 7 year period? Answer-none of them!
Operating Lease
Under an operating lease agreement the leasing company will take a risk in the future value of the asset. At Lombard our asset management team do this for us. They are employees of Lombard without any tie in to manufacturers. As such they are able to provide an independent view on assets.
This future/Residual value is taken into account when calculating the rentals. One way to think about this is to imagine that you were purchasing a new asset at £100,000 + vat. Lets assume the future value is set at £20,000 at the end of 4 years. As the rentals charged are based on the remaining £80,000, we clearly create a significant cash flow benefit during the finance term.
This monthly rental reduction & Cash Flow benefit assists customers, especially those faced with acquiring high value assets.
Key Questions to consider:
- Is the asset being bought to support a new contract?
- Is the contract g/teed to be renewed at the end of its term?
- Is the asset likely to be outdated or superseded by newer technology during the term?
- Would it help to have the asset "off balance sheet" and improve the gearing of the company?
- Do you know for sure what the financial status and requirements of your business may be 3, 5, or 7 years down the line?
- Can you benefit from off setting the rentals against tax?
- Will you benefit from paying vat on the rentals as you go along, compared to paying out in one lump sum at time of purchase?
- Finally, would you like the flexibility at the end of the agreement to either purchase the asset, subject to a sealed fair market bid process, return the asset or extend the rental period.
Given that you cannot predict how your own business and that of your customers may develop in the future , this facility allows you to defer making a decision until the last year of the agreement. Typically we will contact you 6 months before the end of the term to discuss what your preferred end of lease option would be.
The feedback from our customers who have opted for this facility has been very positive. One such customer is Kevin Baird, Managing Director of Basil Baird & Sons limited.
