Machinery Finance
If you’re looking to raise funds for new equipment, you could take secured or unsecured machinery finance. Get the best deal with ABC Finance.
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Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in machinery finance
What is machinery finance?
Machinery finance is a term that describes financial products and services that help businesses buy or lease machinery and equipment needed for their operations. The lender provides the money upfront and the business pays the loan back over time in smaller, more manageable amounts.
A key benefit of this type of financing is that it preserves business cash flow, which is crucial for a variety of purposes such as investments, unexpected bills or tax liabilities.
What are the different types of finance for new or used machinery?
There are a range of options available for businesses wishing to finance machinery that is often a costly, yet essential, purchase.
Using leasing is a popular option for businesses, it is a type of asset finance. A key benefit with asset finance is that as the loan is secured on the machinery and in the eyes of the lender, it carries a lower risk and so likely more preferential terms for the business.
Asset finance can also be referred to as a ‘secured loan.’ Secured business loans are based on assets or ‘collateral’ so the lender will have confidence that monies can be recouped if the business defaults on payments. Often assets such as property or merchandise are used as collateral to secure loans.
How does a finance lease work and what are the main types of lease?
Once you’ve decided what equipment you need to buy then you can either approach a lender directly, or use a specialist finance broker to match you with a lender.
Before speaking to a lender it is a good idea to have a clear business plan showing what equipment is required, detailed costs and how it will benefit the business. This information will support a finance application and give the lender confidence that the agreement is something that will support the business and ultimately mean their investment will be secure.
The lender will pay for the equipment upfront and then this loan is paid back over an agreed period of time with interest.
Machinery finance is flexible and there are three main options for businesses to consider:
Hire purchase
Buying the equipment at the end of the lease arrangement, usually for a reduced cost if the equipment has been used for several years and has depreciated in value.
The business increases its stake in the asset over time, often buying equipment that would not be possible to fund in one outright purchase. When all the payments have been made according to the terms of the agreement then ownership of the equipment transfers to the business.
This arrangement benefits businesses that want to purchase a vehicle but don’t have the ability to pay for it upfront, or wish to spread payments to manage cash flow. As a lender has a stake in the vehicle and it is used as equity interest rates can be more favourable using this secured finance option.
Finance leasing
A business will lease equipment and will have the option to purchase the machinery at the end of the term, usually for a low fee.
The benefit of this option is that it can be relatively low cost, there will be no depreciation costs that come with ownership and some leasing arrangements will include the costs of maintenance and servicing.
Operating leasing
This arrangement allows a business to use machinery for a fixed period; however, the business will not own the machinery at the end of the lease term and it will be returned to the leasing company.
Tax relief and leasing for machinery financing
Tax relief can be a complex area and so make sure to consult a financial specialist if you are looking to reduce your tax liabilities by using machinery finance.
The cost of leasing can be tax deductible, however, this only applies to machinery that is not owned by the business. Once a piece of equipment is owned it is then classed as capital expenditure and this is treated differently for tax purposes.
If machinery is purchased with a loan and the business owns the machinery then there will still be areas where tax can be reduced.
For tax purposes, a loan will be split into two different parts, and only one will be eligible for tax relief, here we explain how tax is applied:
Principal payments
If you finance your machinery through a loan you will repay the loan itself, known as a principal payment, and also interest on the loan. UK businesses cannot claim tax relief on a principal payment and this is because it is viewed as a ‘capital expenditure by HMRC.’ A capital expenditure is seen as something that improves the long term outlook of a business and gaining assets such as machinery belongs in this category.
Interest payments
Interest payments are tax deductible and so tax relief can be applied to this portion of a loan. It is important to demonstrate clearly what your interest costs are and this can be shown by the lender in a yearly statement.
Capital allowances
Capital allowances are a type of tax relief for businesses and in some circumstances HMRC may allow you to write off a portion of the cost of the machinery against taxable profits each year. Over time your asset will depreciate in value and a capital allowance allows this to be recognised through the tax system on a yearly basis.
What are the pros and cons of this type of asset finance?
Pros
There are a number of benefits to machinery finance, although these vary depending on the type of arrangement you choose.
New Equipment
Allows the purchase or use of equipment that your business would otherwise not have access to, or would have to use a large amount of cash reserves to finance.
Fixed Payments
Fixed payments helps a business budget and spread payments out to make them more manageable.
Positive Credit Rating
If a loan or arrangement is paid according to the terms of the agreement this can help improve the credit rating of a business.
No Repair Costs
Where a leasing company provides the equipment, it carries the risk if the equipment breaks and so there are no costly repair bills to plan for.
Wider Market Access
Specialist leasing companies work across the market with a multitude of providers and can often get better deals than individual companies with their buying power and knowledge of the market.
There can be tax advantages to both leasing and purchasing; however, advice should be sought from a financial specialist on tax matters as HMRC rules and allowances are subject to change and this is a complex area.
Cons
Some key points to consider before choosing finance are:
Finance vs Buying
Using finance can be more expensive than buying assets outright.
VAT Registration
Your business will normally have to be VAT registered for machinery finance
Deposit Requirements
You may need to put down a deposit or pay a fee for some arrangements.
Long Term Contracts
You may need to enter into a long term arrangement that may be difficult to terminate if your circumstances change.
Tax Relief
Tax relief is complex and capital allowances (offsetting the value of assets through depreciation against tax) cannot be claimed on shorter term leases under five years, and in some cases seven.
Why should I use a broker to arrange this type of loan and why work with ABC Finance?
There are very many options available for UK businesses, however, working through the products available and evaluating what will suit your circumstances best can take a lot of time. Using an expert broker, such as ABC Finance, means you will have access to a wide panel of lenders that specialise in providing machinery finance and will understand your business.
Our aim is to save you money by finding you the best deal using our knowledge of the markets and to take the stress out of finance so you can concentrate on your business.
We offer competitive interest rates, flexible terms, and a team of dedicated professionals who understand the unique challenges and opportunities of machinery financing. Furthermore, we’ve helped over 30,000 businesses find a loan – our Trustpilot scores and reviews demonstrate how happy our customers are with our service.
ABC Finance business has been supporting businesses since 2000 and is regulated by the Financial Conduct Authority.
What are the alternative forms of business finance?
Short term business loans
Short term financing is designed for businesses with an immediate need for funds.
Typically a short-term loan will range from three to 18 months, although some lenders may offer repayment periods up to two years in duration. Short term loans come in two forms, secured against collateral or unsecured. The latter will only usually be offered at a higher interest rate.
Whilst business loans in the UK are very common there are many types of loans available, and so it’s always important to understand what finance will best suit your needs. If your business is investing in expensive machinery and equipment with a considerable upfront cost a longer term business loan may be more suitable and your broker will be able to review options with you.
Unsecured loans
Unsecured loans are a type of credit that isn’t based on assets such as machinery, property or stock. Lenders will assess the creditworthiness of a business and the likelihood that they will be able to pay back the loan. Unsecured loans are often shorter term arrangements.
This type of loan is considered to be of a higher risk as the lender does not have certainty the payments could be met, or that they will receive their money if the business defaults on the arrangement. Unsecured loans ordinarily have higher interest rates than secured loans.
Business overdraft
A business overdraft is short-term cash injection to a business bank account. If approved by your lender, the required overdraft limit can be increased or decreased to suit your business needs. Business overdrafts differ from a loan in that interest is only charged on the amount by which the business is overdrawn. The overdraft can be repaid as your income allows, but it is worth remembering that your bank may demand repayment at any time. The lender may also charge a fee for the overdraft.
Business credit cards
A business credit card plays a pivotal role in managing a company’s finances, and is specifically for corporate use. They are available to businesses of varying sizes, and can be used to effectively differentiate personal expenditures from business-related costs.
Although business credit cards operate similarly to regular credit cards, there are some notable differences. The most notable difference is that the borrowing limit on a business credit card is generally higher than a standard credit card, as it is based on personal income combined with the business’s revenue.
One further benefit of using a business credit card is that if repayments are made on time this can have a positive impact on the business’s credit rating.
A Merchant Cash Advance (MCA)
A Merchant Cash Advance (MCA) is a form of credit, however it is only available to businesses that accept debit and credit card payments. Finance is provided in exchange for a percentage of credit and debit card sales revenue. It should be noted that there may also be additional fees to pay when entering into an MCA agreement.
Invoice finance and factoring
This allows you to use your outstanding invoices to secure financing. Factoring is where a lender will pay you directly and take ownership of the invoices, they will collect the payment and keep the payment. With invoice factoring the lender will take a fee for providing the service or a percentage of the invoice amounts.
Invoice discounting is part of the invoice finance range of options and this is where the buyer pays promptly for a discount on goods or services.
Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently.
Frequently Asked Questions
The application process is simple, and straightforward, and in most circumstances the ABC team can help you fill in a simple application form and get a quick decision on machinery finance from our specialist panel within hours.
Funds can be transferred to your business within 24 hours of the application.
Request a callback from one of our dedicated advisors to get started: https://abcfinance.co.uk/business-loans/
Yes. In most cases ABC Finance can match our customers with an appropriate lender using our panel of experts that understand the unique challenges that face businesses.
Machinery finance is a form of secured, asset based lending and so this is seen as lower risk than an unsecured loan by lenders and there are a range of products available.
Contact our team at ABC Finance for a callback and discussion about your needs. We are regulated by the Financial Conduct Authority, and with twenty years of experience we use our experience and market knowledge to secure you the very best deal.
Yes. Ordinarily asset financing helps a business gain an asset that it does not own. With asset refinancing, a lender advances money based on assets that are already owned by the business and this can include equipment and machinery.
Using equipment as security on finance can be a convenient way to raise money to help expand and acquire new assets.
The type, condition and value of the asset will be key considerations for a lender, including how much of the asset is owned outright.
No. You do not need to own 100% of the machinery you are putting up as an asset for security. For example, if you have a hire purchase agreement and partially own machinery, you have equity in it. The lender will review the percentage of equity you have when choosing how much they may offer.
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