Asset Finance Opportunities with CBILS

by | Aug 24, 2020 | Business Finance

Under the Government backed CBILS (Coronavirus Business Interruption Loan Scheme), smaller businesses who have suffered lost or deferred revenues as a result of COVID-19, are able to access funding support. One specific avenue that many are taking is that of Asset Finance.

While Asset Finance as a funding solution has always been an option to businesses, prior to the launch of CBILS, businesses would probably have had difficulty raising the funds as the impact of COVID-19 may have forced their application outside of the usual eligibility and lending criteria.  However, due to CBILS, additional benefits currently exist. Arrangement fees are waived, personal guarantees are not required (up to the £250k CAP) and the Government will cover interest charges for the first 12 months.

CBILS Lending Criteria

In order to qualify for the CBILS scheme, a business must have a solid proposal for borrowing the money they need to ensure business survival. In general, the following criteria will also need to be met (although all terms are lender specific):

  • Business activity must be UK based, with an annual turnover not exceeding £45m
  • Applications must be for business purposes only
  • No more than 50% of turnover should be generated from trading activity
  • Between £50k and £250k may be borrowed
  • Repayment terms of between 12 and 60 months are available
  • Prior to the COVID-19 outbreak, the business not to have been in financial difficulty

What does Asset Finance cover?

In simple terms Asset Finance relates to the physical value of assets in a business, whether it be machinery, commercial vehicles, or other tools and equipment.

A number of funding options are available, so let’s explore the main products.

Hire Purchase (HP)

Hire Purchase involves purchasing an asset over a set period of time. Rather than paying a lump sum upfront, the cost is spread over a series of monthly installments. These installments are subject to interest and you will therefore pay more overall than the original cost of the asset. However, once the repayment period is complete, you will own the asset.

During the repayment period, all insurance and maintenance costs for the equipment are payable by the purchaser.

If you require an asset for the long term but do not have the up-front cash for purchase, then Hire Purchase is a practical option to achieve this. In terms of your balance sheet, when using Hire Purchase the item would appear as an asset.

Equipment Leasing

Rather than owning an asset outright, Equipment Leasing simply means that you rent the item for a period. A monthly payment is made to lease the asset without any of the responsibilities of actual ownership. Servicing and maintenance would usually be covered under the lease contract so you would not incur additional costs for these.

When the lease term ends you would usually have three options

  1. Extend the lease
  2. Start a new agreement with an upgraded asset
  3. End the contract and return the asset

In some instances, you will also have the option to buy the asset at the end of the term. The cost of this acquisition would take into account the payments you have already made, and you may even be able to secure finance to assist with the cost of the final purchase payment.

Equipment leased in this way would is classed as an operating cost and for balance sheet purposes, it is therefore written off against gross profit.

Finance Lease

A Finance Lease, sometimes known as a Capital Lease involves the customer renting the asset for most of the item’s useful life. In this scenario you take on the responsibilities of maintenance and servicing but do you do not own the equipment. Your balance sheet would detail this as an operating cost as opposed to depreciating asset, which can in turn act as a tax benefit.

Operating Lease

A shorter term and more flexible option, an Operating Lease allows you to lease an asset for a short period of its life. There are none of the responsibilities of ownership and from an accounts perspective it appears as an operating cost.

If you need regular upgrades of equipment or only need an item for a short period, then this form of asset finance provides a straightforward and flexible solution.

Asset Refinance

Another common route taken which acts almost in reverse of the options described above, is Asset Refinance whereby your existing assets are used to raise capital in the form of a loan. You are essentially using the equity held in the asset to secure the loan finance.

Depending on depreciation, you may be able to obtain 75% of the value of the asset. If you are unable to repay the loan, the lender is of course entitled to claim the asset.

A Round-Up of the Benefits of Asset Finance

  • It allows you to acquire essential equipment, ultimately fueling income and business growth.
  • If you choose Hire Purchase, you will own the item at the end of the agreement.
  • Lease agreement on the other hand, gives the benefits of ownership without the responsibilities.
  • Tax saving opportunities – VAT is usually reclaimable and repayment interest can be offset against profit. Your accountant can determine the most tax efficient option for you.

Asset Finance offers several potential funding options. The most appropriate solution for your business will be dependent on various factors, from the duration you require an asset to future business plans. If you think that Asset Finance could provide the answers you are looking for, then our specialist Finance team can support you in exploring the options and securing capital, particularly during the current period and with the CBILS initiative in mind.

If you would like a simple no obligation discussion please call John on 07544 503 001 or email johnmacnamara@kingstonburrowes.com