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asset finance leasing

Wednesday, September 16th, 2009

Asset finance leasing is becoming increasingly more difficult to organise. With the exit of Lombard and Hitachi from the broker market there are only a few funders remaining in the market place. Many high street banks have their own asset finance division but they tend to do only the bigger deals over £50,000 for their own customers. If the deal is for under £50,000 they will potentially push the customer down the loan route.

The problem with this is that it could restrict a businesses ability to organise future non asset based lending.  What is the point of utilising  valuable credit lines and funding asset purchase via loans instead of using a third party funder to provide a hire purchase or finance lease facility. In our opinion any capital expenditure is best suited to a hire purchase or finance lease facility which will leave the bank credit lines available for a rainy day.

We say it time and time again. Use the bank for clearing facilities, an independent for your factoring and invoice discounting. Remember if you need an overdraft it wont grow with the business like factoring and invoice discounting and any overdraft is potentially repayable on demand. Using a third party leasing company will ensure that you don’t have too many eggs in one basket and you are not exposed too much to any one financial institution.

There are still third party finance companies open for business. Getting deals agreed isn’t as easier as it was 18 months ago however a good independent finance broker will be able to guide you through the pros and cons of the different finance companies.

Lloyds Blame HBOS for £4bn Losses

Wednesday, August 5th, 2009

Apparently the LLoyds banking group has made a pre tax loss of £4billion in the first six months trading of this year. This is the result of Lloyds taking over HBOS where an unprecedented amount of risk taking led to its failure and ultimate bail out by the tax payer.

I bet LLoyds wish they hadn’t bothered now. More interestingly  if the bad debts of HBOS are stripped out, LLyods would have made a operating profit of £6bn. It makes you wonder what sort of cretins were running HBOS so that £10bn of bad debts have effectively been written off in the first 6 months of this year.

The outlook is that LLoyds will right of more bad debts in the second half of this year, but thankfully not as many. The long term outlook is that LLoyds are predicting a recovery in 2010.

Up until the credit crunch we saw many risky deals being done not only by HBOS but by other prime lenders as well. Not only were these deals being done in the traditional banking sector, very risky deals were being done on equipment finance. We were seeing some hire purchase and finance lease deals being agreed which in our opinion it would be unlikely a second or third tier funder would approve.

Not only that, once a deal was agreed no account of the risk was taken into consideration and the deals were being priced too cheaply. Bank and asset finance is a risk reward business and financial institutions have an obligation to balance their portfolio in terms of risk and pricing. It appears the banks have learnt their lesson and for the time being rates will continue to be priced accordingly.

Financing Imported Machinery Continued

Tuesday, July 28th, 2009

OK , so we have discussed the options for making payment to the supplier but what is the best way to pay for the machinery and what are the best finance options?

The majority of foreign suppliers will either invoice in euros or US dollars. The finance company will book the foreign currency to provide an exact exchange rate and use the sterling equivalent on your documentation.

At this point it is worth mentioning that finance companies are not importers and it is either the supplier, their UK agent or the customer to make sure the necessary arrangements in terms of VAT numbers, import duties etc are made with the appropriate import authorities.

Although the  foreign suppliers invoice will have NO VAT as soon as a UK finance company raises either a hire purchase or finance lease document VAT becomes payable. If hire purchase is required all the VAT becomes payable in advance to the finance company. AS with any finance lease facility Vat is only paid on the deposit amount and the remainder of the VAT is paid on the monthly repayments.

However with the correct documentation and structure it is possible to provide a Vat neutral hire purchase deal so no physical payment is actually made. This only works where foreign suppliers and is structured as follows.

Instead of invoicing the finance company, the foreign supplier raises an invoice direct to the customer in euros or whatever the foreign currency maybe. The customer raises an invoice to the finance company for the sterling equivalent and because this is a UK invoice VAT must be applied. The customer will request that the proceeds of the invoice will be paid direct to the  supplier.

The finance company prepare their hire purchase documents and the Vat on the HP doc cancels out the Vat on the customers invoice. By doing the deal in this way the customer in affect becomes the UK agent and is normal practice for a standard agency agreement to entered into before the transaction commences.

Financing Imported Machinery

Monday, July 27th, 2009

Financing imported machinery can be quite a complex issue. Often the supplier will requiring paying up front however the finance company is loathed to release payment before the equipment is delivered to the customers premises.

More often than not a common sense approach can be reached whereby an amount equal to deposit is paid across to the supplier to provide some commitment. Providing the supplier is provided with some form of evidence that a hire purchase or finance lease facility has been agreed this is usually enough to get the machinery on its way. Most UK finance companies will release payment tothe supplier on evidence that the machinery is on UK soil .

To protect the customer a small retention of 10-20% of the net cost of the godds can be withheld until satisfactory installation. If the supplier is unwilling to release the machinery or equipment prior to shipment before receiving payment in full it was once possible for a funder to provide a  pre facility loan or overdraft.

For obvious reasons the customer would need to be pretty strong in terms of their financial standing. These facilities were more often than not offered  by bank owned finance companies however in the current era of restricted credit most of these facilities have been withdrawn. However not to say a bank might not provide an overdraft facility for some of their better customers.

If none of these are an option  it may be possible to arrange a letter of credit.  This is basically  a bank backed guarantee stipulating that providing certain conditions are fulfilled payment to the supplier is guaranteed. XL Business Finance has experience and expertise at negotiating with foreign supppliers and ensuring the correct wording and documentation is provided to enable the quick release of funds and at the same time providing protection for the customer and comfort the supplier.

Hire Purchase or Finance Lease?

Tuesday, July 21st, 2009

We often get asked which is the best way to finance capital equipment. In short the answer can be subjective and we will always refer you to your own accountant. However we can provide you with the differences which will probably point you in the right direction.

A hire purchase and finance lease facility are both ways of funding capital expenditure requirement however they are structured in slightly different ways and have slightly different tax treatment.

With a hire purchase facility all the VAT must be paid up front with a deposit of usually 10% of the net amount. At the end of the agreement and with payment of the final payment an option to purchase fee is paid and legal title passes to the customer. The equipment is shown as an asset in the companys balance sheet from the onset of the hire purchase agreement with a corresponding liability for the finance agreement. Capital allowances are claimed on a reducing balance basis.

With a finance lease the equipment is still shown as an asset and liability in the balance sheet however there are several fundamental differences. Firstly the VAT is spread over the term of the agreement and paid with the monthly rentals. Therefore from a cash flow point of view finance lease can work better for some customers. Instead of claiming capital allowances the monthly rental is offset against the profit and loss account therefore the full benefit from a tax point of view is claimed over the exact period of the lease. This can be advantageous if the equipment being funded is high tech and will need to be replaced at he end of the agreement. However at the end of the agreement the finance lease will go into secondary rentals which are equivalent to one months rental being paid on an annual basis. Alternatively the kit can be sold and the customer retains typically 95% of the sale proceeds. The remaining 5% is paid to the finance company along with the VAT

Declined Finance?

Friday, July 17th, 2009

In my opinion leasing comapanies are continuuing to tighten their underwriting criteria. Every week we receive an email from a finance company saying they have pulled out of financing this sort of equipment or don’t want to finance businesses in that industry sector. Providing you have been trading for more than 3 years, you have a very strong balance sheet, you are very profitable and your accounting information is bang up to date you should have no problem obtaing a hire purchase facility or a finance lease facility, however it is no guarantee. Leasing companies are  paying particular attention to sercieability so it is now necessary to provide 3 months recent bank statements as part of the underwriting process. If you are one of the lucky ones you will get a nice interest rate and nice terms. This is good old balance sheet lending. Happy days!

Unfortunately there seems to be more bussinesses struggling to obtain finance than businesses getting clean acceptances. Until recently here were a handfull of funders that positioned themslves just below the high street funders taking a commercial view on the deals that did not appeal to these high street lenders.

The bad news is that the near prime funders have nearly all disappeared due to their inability to obtain funding themselves on the wholesale market. The asset based lenders will do deals however they nearlly all want to be asset secure. Therefore if you are buying a piece of kit costing £250k and they perceive the forced sale value at £125k they will require an additional £125k worth of  security. This can be in the form of unencumbered kit or can be equity in commercial or residential property. It may even be possible to refinance equipment and machinery coming to the end of a lease or hire purchase agrement.

If no addional security is available many businesses are finding themselves caught between a rock and a hard stone.


XL Business Finance Ltd is a privately owned and independent business financing company with established links to many of the UK's leading finance houses. XL Business Finance provides a viable alternative to high street banks that lack the flexibility and imagination to provide a solution to most business users requirements. XL Business Finance can provide a full range of business financing solutions and we ensure a high level of customer service and pride ourselves on quick decisions. Our independent status will ensure any offer of funding and asset finance leasing is best suited to our customer’s needs.

XL Business Finance Limited are authorised and regulated by the Financial Conduct Authority FRN 718737).

XL Business Finance, Eaton Place Business Centre, 114 Washway Road, Sale, Cheshire M33 7RF UK.


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