Guide
Everything you need to know about financing plant machinery...
If you want to get new or used plant machinery on finance, there are a few different options that could work for your business. Let's have a look at what's available.
Words by: Auto Trader
Published on 13 August 2018 | 0 min read
Leasing
Equipment leasing is a good place to start if you're thinking about financing plant machinery. Also known as 'contract hire' or simply 'plant hire', it's effectively a rental agreement, and it's the most flexible form of plant machinery finance.
Because so many businesses use plant machinery for short-term projects, lots of companies offer plant hire by the day. Generally though, if you want to rent plant for longer than a few weeks, you'll be looking for leasing contracts. With leasing, you have a simple monthly payment for use of the equipment, and maintenance is often included. Because you never own the plant, you don't have to worry about any of the disadvantages of ownership - if something goes wrong with the equipment, it's normally the lender's responsibility to sort it out. When the contract is finished, you simply hand back the equipment, or start a new lease. Another benefit of leasing plant machinery is that it is accounted as an operating cost. This may improve your tax position, because profits are offset - although you should talk to your accountant about the specifics of your situation.
Because so many businesses use plant machinery for short-term projects, lots of companies offer plant hire by the day. Generally though, if you want to rent plant for longer than a few weeks, you'll be looking for leasing contracts. With leasing, you have a simple monthly payment for use of the equipment, and maintenance is often included. Because you never own the plant, you don't have to worry about any of the disadvantages of ownership - if something goes wrong with the equipment, it's normally the lender's responsibility to sort it out. When the contract is finished, you simply hand back the equipment, or start a new lease. Another benefit of leasing plant machinery is that it is accounted as an operating cost. This may improve your tax position, because profits are offset - although you should talk to your accountant about the specifics of your situation.
Hire purchase
Hire purchase feels similar to leasing, but the key difference is that you'll own the plant at the end of the contract. It's what you might call 'buying on finance', so each monthly payment goes towards the total purchase price.
You might choose hire purchase because you want plant machinery for the long-term, but don't want to tie up lots of cash in one big purchase. It's important to remember that aside from spreading the cost over time, hire purchase leaves you in the same position as buying outright, and you'll have all the same responsibilities like maintenance and insurance. One important aspect of this is that whatever plant you acquire using hire purchase will appear on your balance sheet as an asset from day one. This might make much difference if you're looking at one piece of plant machinery, but for larger firms looking at many assets it could add up, so it's worth discussing with an accountant.
You might choose hire purchase because you want plant machinery for the long-term, but don't want to tie up lots of cash in one big purchase. It's important to remember that aside from spreading the cost over time, hire purchase leaves you in the same position as buying outright, and you'll have all the same responsibilities like maintenance and insurance. One important aspect of this is that whatever plant you acquire using hire purchase will appear on your balance sheet as an asset from day one. This might make much difference if you're looking at one piece of plant machinery, but for larger firms looking at many assets it could add up, so it's worth discussing with an accountant.
Business loans
If purchasing plant machinery is just one of several purposes you want to finance, a business loan might be a good fit. For example, you could use part of the loan to buy new plant machinery, and use the rest for other growth expenses like purchasing raw materials. Business loans fall into two main categories - secured and unsecured. As the name suggests, a secured business loan is backed up by 'security', i.e. physical items, while an unsecured loan is not.
Choosing between the two comes down to what items your business owns. Perhaps you already own some plant machinery? If so, you can use the resale value of these assets to get a secured business loan for some new plant. With a secured loan, the loan amount is based on the value of the item, which can be sold by the lender if you stop making repayments. For example, if you own some plant machinery worth £50,000 you may be able to borrow £25,000-£35,000. On the other hand, unsecured business loan are based on the bigger picture of your business, which means the lender will look closely at your financials to determine affordability. You'll also need a few years of trading history to be eligible. Without any security, lenders are likely to ask you for a personal guarantee, which means you're responsible for paying back the loan if your business can't. You should talk to a lawyer before signing anything, and some business owners will prefer secured loans over giving a personal guarantee.
Choosing between the two comes down to what items your business owns. Perhaps you already own some plant machinery? If so, you can use the resale value of these assets to get a secured business loan for some new plant. With a secured loan, the loan amount is based on the value of the item, which can be sold by the lender if you stop making repayments. For example, if you own some plant machinery worth £50,000 you may be able to borrow £25,000-£35,000. On the other hand, unsecured business loan are based on the bigger picture of your business, which means the lender will look closely at your financials to determine affordability. You'll also need a few years of trading history to be eligible. Without any security, lenders are likely to ask you for a personal guarantee, which means you're responsible for paying back the loan if your business can't. You should talk to a lawyer before signing anything, and some business owners will prefer secured loans over giving a personal guarantee.
Conclusion
When you want to add plant machinery to your inventory, there are a few different types of finance that could help. You could buy it in instalments using hire purchase; pay for machinery as well as other costs with a business loan; or rent the equipment using plant hire or leasing.
If you're struggling to decide, there are few rules of thumb you can bear in mind. Leasing is best for short-term needs or an uncertain future, while hire purchase is best for spreading the cost of an asset you'll use for years. For more flexibility or when you've got more than one cost to think about, a business loan might make sense, so you've got a bit more freedom. Whatever you're looking for, services like Funding Options can help you narrow down your options quickly, to find the best option for your firm.
If you're struggling to decide, there are few rules of thumb you can bear in mind. Leasing is best for short-term needs or an uncertain future, while hire purchase is best for spreading the cost of an asset you'll use for years. For more flexibility or when you've got more than one cost to think about, a business loan might make sense, so you've got a bit more freedom. Whatever you're looking for, services like Funding Options can help you narrow down your options quickly, to find the best option for your firm.