Making finance pay

Q What can Lombard do to help me finance some of the costs that accompany my investment in a new asset? For example, I find the biggest cost to me is not the new machine but the increase in staff, training or infrastructure that accompanies it. I'm not a fan of invoice discounting as it creates more short-term debt. Why can't asset finance be more like a car where you get an on-the-road price that includes things like car tax? Normally an asset finance agreement can incorporate any cost that is directly attributable to the purchase of the asset. This would typically consist of the transportation cost and installation, and may include any initial training. However, generally it would not cover ongoing training fees as this would be seen as a cost to the business. While acknowledging that there may well be increased cost of new staff, training or infrastructure, this should be a relatively short-term cost and once the increased productivity and earning potential created by the new equipment filters through, this should offset the initial increased spending. In addition, new technology is more energy efficient and requires less maintenance than old kit, so while productivity increases, running costs may be significantly reduced when compared with the costs of operating existing equipment. With reference to asset finance including more of the ongoing costs associated with new equipment, this already happens to some degree. For example, our Lombard Technology Services team is able to incorporate IT maintenance and disposal costs into the cost of the contract. Indeed we would not rule out working in partnership with equipment suppliers in future where this enables us to deliver a more comprehensive service to our customers. In this way a contract could be developed to include the servicing costs, thus combining the asset finance expertise with the specific expertise required to maintain equipment. A good example of this is a current project where we are working with energy service companies to help businesses to finance and run energy-saving devices in order to meet carbon reduction commitments. Many companies do not have money set aside for this, despite the very strict protocols laid down by the government, but by working with suppliers, Lombard can offer funding to enable more businesses to run energy-saving devices. Q Why is the cost of borrowing so high compared to the base rate of interest? The interest rate is 0.5% yet we're offered borrowing at 5, 6 and 7%. It feels like we're paying the price for some poor investment decisions in the past. Also I've found lenders want payback on a piece of plant on a short-term basis (one year) rather than the two or three year deals that were prevalent before the crash. Firstly, it is important to understand that bank base rates are not a true reflection of the cost of money. The London Interbank Offered Rate (LIBOR) – ie, the rate at which we can borrow – is actually higher than bank base rate, and if you add on other lending costs and our own margin, this is the rate at which we can lend in order to sustain our business. Secondly, turning to lending terms, asset finance providers will look at the life of the equipment that is being financed. In the case of high-value equipment that may include large plant and machinery or containers, the typical lease is seven years. However, if the equipment is subject to rapid technological change resulting in a shorter replacement cycle, a typical contract term is likely to be three years. Overall our average contract is in the region of 42 months. The one-year lending term to which you refer would be extremely unusual for an asset finance contract. There is some equipment where we look at its individual lifecycle. For example, we are leasing a significant amount of energy-saving meter equipment that typically has a lifespan of 10 years, at which point it may need recalibrating. In this case the typical lending term is seven years. Essentially asset finance providers endeavour to provide as much flexibility as possible and to reflect on individual equipment wherever we are able to. Q What penalties do I incur if I decide I no longer need a piece of capital equipment part way through our agreement? Who handles its sale and who receives the cash it realises? When a contract is put in place, our team will work with your business in order to establish the lending term and repayment pattern. The contract will reflect any fixed costs that will be spread over the duration of the contract. If the business's needs change and the equipment is no longer required, it is likely that there will be some charges to recoup the fixed costs incurred. Where an agreement is terminated early and the equipment is sold, typically the asset finance provider would appoint the customer as sales agent, or occasionally they may sell the equipment themselves or appoint an independent third party as an agent to sell the kit. For equipment that is subject to a hire purchase agreement, the customer would retain all of the net proceeds of sale (after the HP termination cost are met), or where the assets were the subject of a lease, the customer may retain 95% of the net sale proceeds (again, after the lease termination costs are met). Q As a small manufacturing business, I prefer to wait until I can replace equipment using outright purchase rather than leasing, as I don't want to be burdened with the commitment of monthly payments. Isn't asset finance a product more suited to larger businesses? Asset finance benefits businesses of all sizes whether small or large. Rather than monthly payments being a burden, they enable a business to spread the cost of capital investment, freeing up valuable cash for other expenditure in the business. It also enables a business to accelerate investment decisions, further supporting the business's growth. Flexibility is at the heart of asset finance and businesses can tailor the facility to match a specific contract or business depreciation policy – so, far from being a burden, asset finance can enable a customer more opportunity to manage their finances to suit the specific needs of their business. The range of facilities available not only allows for individual cashflow requirements but can also enable the financier to take the risk on the resale value of the asset. This flexibility allows businesses to do less with more, and to expand into new markets and recruit more valued staff. This is supported by the experience of businesses that have used asset finance at least once. These businesses, regardless of size, return to use this form of funding for 50-60% of their capital investment needs. This is further supported by recent research carried out for Lombard that highlighted that those companies that took part in the study and that had used asset finance had an 'overwhelmingly positive' experience of the product. However, delaying investment can not only restrict business growth, but running old equipment can be costly in terms of running costs as generally older equipment uses more energy and has higher maintenance costs, as well as being less productive. Lombard is fully committed to the SME market and sees asset finance as a more accessible form of funding that will enable the investment needed to allow even the smallest SMEs to grow profitability. n further reading The previous two articles in this series revealed how asset finance is helping UK manufacturers to get their businesses back on track following the downturn, plus how to navigate the funding application process to secure the best deal. These articles are available online at www.worksmanagement.co.uk. For information on asset finance, go to www.lombard.co.uk.