Key considerations for equipment leasing
Having the right equipment for your business is vital. Cripps Pemberton Greenish associate Aleks Wulff looks at the potential of leasing.
When it comes to contract catering the cost of buying equipment can be prohibitive, making leasing look like a favourable option for your balance sheet.
It can also have tax benefits because of the potential to deduct rental payment and depreciation from income (check this with your accountant); it can give you easy access to the latest technological advances; and, although in the long run you may pay more compared to buying, you also have the option of regularly changing-up. However, as good as all this sounds, there are still some things caterers need to bear in mind before committing.
Finance companies typically offer three types of arrangement: hire purchase, finance lease or operating lease, each of which may give a slightly different ownership structure, payment terms and responsibilities. Most require an initial deposit, all demand regular repayments.
Usually, with a hire purchase agreement you are effectively purchasing the equipment over the term – these are often subject to a large final “balloon” payment. You are more akin to a traditional owner with a hire purchase arrangement.
In contrast, with a finance lease, the provider purchases the asset and rents it to you, so you never own it in the traditional sense. Instead, the finance company will make arrangements to sell the asset at the end of the term and will usually offer you a proportion of the sale value. With an operating lease you have no ownership rights. These arrangements are usually geared towards high value or specialist equipment and promoted as taking away the risk of a fall in value of the asset, but you will often be required to insure and maintain it.
Like bank loans, asset finance arrangements are often subject to status and conditional upon your providing the requisite guarantees and indemnities. This means the provider will need information on the company’s finances, including arrangements with banks and other finance providers. If this is required you should ensure it does not breach the terms of any existing finance arrangements.
Make sure you understand all the legal and financial terms of the product offered and compare providers. Look at fees, early termination penalties, regular and default interest (which you would pay on top of the standard interest rate) as well as arrangements and potential additional costs for maintenance, repair and insurance. Be aware of any warranties (promises) you may have to give in respect of the equipment and potentially in relation to your business more generally and understand the rights of the finance company – inspection of the equipment for example, and, crucially, termination provisions which can be onerous.
You should also check your ability to transfer the asset as part of a business sale to ensure the proposed contract gives you the flexibility you need if you look to restructure or sell.
Understanding that fundamentally you are entering into a long-term contractual commitment rather than buying an asset should help you to evaluate the choice for your business. If in doubt see contact Aleks Wulff at firstname.lastname@example.org or on 01892 506127.
First published in B&I magazine on 1 October 2017.