News & Blog
Telematics: hardware purchasing, leasing as an option.
Many of our clients operate a business model that offers a monthly payment for the service their clients receive, including the hardware and install. This means that clients carry the early expenditure costs and see this recovered over a period of time. However, could that initial capital outlay (i.e. the initial funding of the hardware) be put to better use and fund further deals or expansion?
What follows is an outline of the advantages to leasing, as explained to us and here to start a conversation, it doesn’t cover all aspects in terms of the pros and cons of finance options (as we’re not a financial institution, a lender or experts in these matters) and is for information only.
Background
Clients asked us to provide a method that would allow them to get the hardware they need but pay for this over a period matched to the deal that they offer their customers. To do this we went to several of the equipment leasing companies out there and selected a partner suitable for the needs of these clients, with experience in leasing on equipment.
About CF Capital (our leasing partner)
CF Capital PLC was formed in 1988 and has grown organically to become one of the largest and most powerful broking organisations in the UK. To date, we have arranged in excess of 300,000 leases and enjoy strong relationships with the UK’s leading banks, funders and financial institutions.
Leasing Benefits
According to our leasing partner, others we discussed this with and our clients, not only does leasing offer advantages in terms of cash flow and planned expense matched to incomes, it also offers tax advantages due to the nature of it being an operational expense vs a capital expense.
Leasing is not expensive!
Many people believe leasing is an expensive option. This simply is not the case. This is why even large ‘cash rich’ companies are choosing to lease.
Unlike many high street bank facilities or overdrafts that are subject to the change in market conditions, a lease facility with its protected payment and fixed interest rates allows for effective future budgeting.
100% allowable against pre-tax profits!
Because finance lease rentals are 100% allowable against pre-tax profits, the total cost of your purchase, capital and interest can be offset during the lease period, with your payments deducted as a trading expense. Contrary to popular belief leasing is not expensive, in fact the real cost of your lease can be significantly lower than the payments you make!
A cash purchase will allow tax relief only on the capital allowances on the equipment. This is currently 18% of the cost in the first year and 18% in subsequent years based on a reducing balance each year.
Below is an example, for information only (in UK Pounds and exclusive of VAT)
Equipment Cost: £10000
Lease Period 3 Years
Payment Frequency Quarterly
Company Tax rate 19%
CAPEX (OUTRIGHT PURCHASE)
Year Capital Allowance Tax Relief
1 18% of £10000 = £1800.00 Less 19% = £342.00
2 18% of £8200 = £1476.00 Less 19% = £280.44
3 18% of £6724 = £1210.32 Less 19% = £229.96
Total Tax Relief = £780.40
LEASE RENTAL
Year Capital Allowance Tax Relief
1 4 Rentals of £1036.80 Less 19% = £787.97
2 4 Rentals of £1036.80 Less 19% = £787.97
3 4 Rentals of £1036.80 Less 19% = £787.97
Total Tax Relief = £2363.90
By choosing to lease you have saved £1583.50 in tax relief
Source CF Capital PLC (http://www.thecfgroup.eu/?page_id=208)
What happens at the end of the lease period?
At the end of the lease period there’s a single ‘transfer of ownership’ payment (a sensible, nominal sum and detailed at the start of the agreement), meaning that the equipment is then fully owned by the client and therefore can be reused (either uninstalled and reinstalled elsewhere, or used as a bargaining tool to renew a contract continuation with the existing end customer). There’s no large ‘bubble’ payment to be made to retain ownership.
Summary
Based on requests from clients we found a route for them to quickly and easily fund initial outlay for the equipment (subject to status) that matches the planned income from their customers, with a ‘tried and trusted’ partner, allowing them to own the equipment at the end of the lease and offer a competitive and cost effective way of funding the purchase (other lenders are available and clients are welcome to research and find their own).