Mike Hartley, managing director at Praetura Asset Finance, discusses the solutions that can help SMEs grow their business by utilising their assets
All the indicators for the construction sector have been positive recently and the Construction Products Association has even revised up its most recent growth predictions for the sector to 22% over the next five years. It’s all great news for SMEs, as they finally stop firefighting just to survive and begin to implement their growth strategies.
But there is a sticking point: in order to grow, many companies need to invest in new equipment. Traditionally that either means using existing capital (in short supply for most), borrowing capital (still no easy task, despite pressure on banks to release funds for lending) or seeking investment (which involves relinquishing equity or sharing profits).
However, there is a fourth option, which is not only more accessible for many SMEs but is also preferable in terms of borrowing costs, risk and flexibility.
That option is asset finance; a means of financing investment in assets, such as plant or vehicles, that leverages the value in your balance sheet and your existing asset portfolio. It’s a tax-efficient financing method, specifically designed to facilitate growth, so an asset finance specialist should assess your credit potential based on the additional revenue that investment in new assets will generate.
It calls for a level of pragmatism which is simply not in the culture of traditional lenders and, in simple terms, if offers SMEs three options:
- A hire purchase (HP) approach enables acquisition of costly equipment through an instalment plan. Just like buying a car on finance, this type of funding agreement means that the asset remains the property of the asset finance specialist until a final payment has been made, which includes a one-off option-to-purchase fee, transferring ownership to your business. One of the major benefits of this approach is that the amount of repayments are fixed, aiding financial management. HP contracts are also subject to VAT whilst the repayments remain exempt.
- A lease approach enables your company to have full use of the asset for an agreed time period without the liability of ownership. Again, costs are fixed and paid in instalments. At end of the period you can choose whether to continue use under the same agreement or sell the item to a third-party, in which you’ll receive up to 95% of the sale. A big benefit of leasing is that you do not have to source a deposit and VAT payment upfront, which can help to boost cash flow.
- Refinancing enables you to utilise the value in your company’s existing assets to release funding for a variety of uses, including expansion, management buy-out or buy-in, HMRC payments and cash flow alleviation. This option involves ‘selling’ ownership of the equipment to the asset finance company for the duration of the agreement but your business can continue to use it and ownership can be transferred back at the end of the agreed term.
With the construction market recovering at an increasing pace, now is the time to target growth and invest in expansion. Accessing the funds you need to do that could be easier than you thought.