Asset Finance has been gaining in popularity as a means of funding investment. Neil Lloyd of Lombard, RBS’ asset financing arm, explains why – and highlights that businesses should hurry to make use of their Annual Investment Allowance before it disappears.
In the six years since the banking crisis, we have seen a shift in the way businesses regard and access finance. Overdrafts are no longer an automatic choice and while bank loans remain widespread some of their characteristics make them less popular than they once were – not least, the fact that they are typically secured against property, using up valuable collateral.
What is a business to do if it wants to invest in production equipment or other bigticket hardware? The answer may well be in asset finance: perhaps better known as hire purchase or leasing, it is secured on the asset itself and thus frees up security, so it is hardly surprising that it is becoming more popular.
“We have seen phenomenal growth in asset finance over the past couple of years – around 17 per cent,” says Neil Lloyd, Head of Sales Development, Lombard. “The awareness of the product is better than it was and greater demand has meant that many funders have returned to the marketplace.”
Increases across the board
The latest figures from the Finance & Leasing Association (FLA) show 10% growth in asset finance new business to period October 2014, compared with the year before. Most of that was at the lower end; new borrowing in projects of up to £20 million increased by no less than 21 per cent. Individual sectors grew even more.
SRD Engineering, of Bicester, Oxfordshire, is a family-owned high-quality precision engineering company with customers in the aerospace, electronics and motorsport industries, including six Formula 1 teams. It has 40 employees.
The size of SRD’s existing premises was limiting the firm’s ability to grow. The company decided to move to a larger site in the town, which would enable it to expand capacity and meet extra demand. It also wanted to invest in new manufacturing equipment and through a hire purchase agreement with Lombard it acquired six new CNC lathes, which enabled it to increase its production capacity and the speed with which its products can be manufactured.
This means that the business will be able to focus on continuing growth while staying at the forefront of precision engineering technology – a crucial factor in succeeding in the sector.
IT equipment finance rose 52 per cent and the commercial vehicle sector increased by 28%, for example. Asset-financed purchases such as plant and equipment totalled over £5 billion in the 12 months to October 2014, which was 17 per cent up on the year before – and it could be accelerating, as financing in the month of October 2014 alone was 28 per cent up on 2013.
“We are looking at another 10 per cent growth next year,” says Lloyd. Oxford Economics has forecast continuing strong investment in 2015 in the manufacturing sector. Some of the dramatic growth has been a process of UK manufacturing businesses replacing dated assets.
The recovery is now becoming very evident and has been multi-faceted. There are a number of factors driving this surge in new demand; awareness of asset lending is now more widespread; more lenders have come into the market; and the product itself has improved.
Furthermore, thanks to improved flexibility and closer connection to business realities, credit policies have changed and funding over longer periods is now possible. Lombard itself has been involved in raising awareness and has formed partnerships with EEF and the Institute of Mechanical Engineers to highlight to manufacturers the alternative funding methods available to them and also to lobby for investment incentives such as the Annual Investment Allowance (AIA).
Annual Investment Allowance
It is important that the value of asset finance in claiming AIA is more widely understood. JCB Finance – a joint venture between the plant manufacturer and Lombard – undertook a survey that found awareness to be very low. This was further supported by research from Lombard which found that only around 20 per cent of SMEs had used their AIA, which is a very low threshold.
“It’s not always easy to keep on top of all the incentives available to businesses,” Lloyd explains. “And sometimes, the route to get hold of finance – the Regional Growth Fund, for example – is not always clear. People might not be aware of what they need to do and therefore Lombard works closely with its customers to highlight such incentives that may be beneficial to customers.”
For example, it may come as a surprise to learn that the AIA covers the overwhelming majority – around 90 per cent – of deals with which Lombard is involved. AIA in the form of hire purchase – “intent of ownership” offers businesses of all sizes 100% capital allowance on qualifying capital expenditure in the year of purchase. Sole traders and partnerships (but not mixed personal/corporate partnerships) qualify as well.
The treatment of leasing is a bit different. As it is the leasing company that claims the capital allowance, which it passes on to the borrowing business as lower rental payments. This could be a more appropriate route for businesses that do not have large taxable profits.
Avalon Plastics, founded in 2003, employs 120 people at its main office in Glastonbury and an additional site in South Wales. It specialises in plastic injection moulding, from designing and tooling to final products, which range from car baby seats to fragrance dispensing systems.
Avalon used asset finance to purchase 11 new robotic machines, which are capable of running 24 hours a day, seven days a week, in an automated process. Lombard provided funding for the machines by hire purchase, with an initial four purchased in summer 2014. Seven more were up and running by the end of the year.
The consequent increase in production capacity contributed to a turnover of £14m in 2014, up 15 per cent compared with the previous year, as well as the creation of 15 new jobs.
Both methods of funding have different accounting implications and Lombard would recommend that businesses ask for guidance from their accountant or an independent financial adviser.
The time is now
In the March 2014 Budget Statement, the Chancellor announced that the AIA would be increased £250,000 to £500,000 a year from April 2014 – but only until January 1 2016. What will happen after that date is not yet clear but it may revert back to £25,000 – just 1/20th of the current rate.
Which means that it could be a good idea for businesses considering purchasing capital equipment to set the wheels in motion promptly, as it takes a while for deals like these to be processed and concluded.
“Lead time is typically four to six months,” Lloyd says, and adds that tax year should also be taken into account. Assets that quality range from lathes and CNC machines to production lines, as well as office furniture to wind turbines.
The current increased level of AIA can enable businesses to transform their productive resources. It would be a shame to waste the opportunity.
RBS and Lombard work with manufacturers in all sectors and are committed to helping UK businesses position for longterm growth.
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