Moving to a Leasing Model – How Mobile Phone Contracts Show Us the Way
We all like to have the latest equipment, especially in business. Being able to show you are at the cutting edge of technology can be very important – it encourages your employees and means you present well to clients. Not only that, but it gives you access to the advantages that top-end technology offers.
The potential financial outlay to keep at that cutting edge, however, can be staggering. Asset finance and equipment leasing offer a way to both remain at the top of the technology food chain and spread the cost of equipment such that it doesn’t damage your cashflow or credit.
How mobile phones paved the way
The idea that mobile phones were too expensive simply to be bought for most people, and that some sort of contract deal needed to be in place in order to afford them has been about since the turn of the century and was solidified by the surge in expensive technology that came about once the iPhone launched in 2007.
Mobile phone contracts are essentially asset leasing for the masses, providing a convenient way to keep up-to-date with the latest technology. With phones topping £1,000 now, the idea that an average consumer could afford to replace their devices every year or two would be simply outrageous without the contract system, yet look around at the number of iPhone Xs in the hands of people today – it works and it works well.
Finance contracts for your business equipment
Despite the universal acceptance of personal mobile phone contracts and the understanding that it allows access to the latest technology for a monthly fee, some businesses can be reluctant to apply the same model to the rest of their equipment.
Yet IT leasing to solve the need for up-to-date computer technology, or car leasing to provide a brand-new car at a fraction of the cost (and risk) are all available for the savvy business owner. In fact, it doesn’t need to be limited to technology – plant and machinery is another example of assets that can be funded by asset finance and leasing.
Holding on to the tired concept that everything needs to be bought outright and owned by the business can damage a business greatly, holding it back by assigning funds in the wrong places instead of embracing a model that provides freedom and an opportunity for better directed growth.
Helping your business bookkeeping
Owning everything your business uses often stretches capital and impacts cash flow. Relatively small items, such as tablets or laptops, can soon add up if you have more than a few staff. Larger scale equipment such as cars and vans can put a substantial squeeze on cash reserves, and more significant pieces of equipment, such as large-scale construction vehicles or specialist machinery can be a very expensive investment.
You have a limited amount of capital, and it must cover the cost of skilled employees and project investment as well as the equipment you use.
Unless the asset is likely to be a good investment, such property, do you really want it on your books? After all, the depreciation of a car or high-end computer is not inconsiderable.
Through the various forms of asset finance and equipment leasing, you optimise your working capital and ease cash flow.
Understanding asset finance
Finance companies understand that there are a variety of needs, and so there is a variety of asset finance options to suit.
These are broadly split into lease or purchase models. The two main leasing options are finance lease and operating lease, which work in subtly different ways:
The finance lease model
With a finance lease, the risks are placed mainly on the lessee (the company taking out the lease) than the lessor (the company providing the asset).
Finance lease allows for regular monthly budgeted payments for the term of the lease after which time the asset is sold by the lessee to cover the agreed final payment. If the lessee has damaged the asset during the time, then they may find themselves having to cover a shortfall between the amount obtained by the sale and the payment owed.
With a finance lease, the asset is included on the balance sheet of the business, raising the asset profile of the company.
Finance leases are typically utilised when the lessee wishes to keep the asset for the entire length of its useful lifespan.
The operating lease model
With operating lease, the asset is returned to the lessor at the end of the term and any damage beyond fair wear and tear will incur charges that must be paid by the lessee.
Like finance lease, operating lease allows for regular monthly payments rather than a significant outlay to purchase the asset. Those payments typically represent covering the cost of depreciation and are substantially smaller than any loan repayment that would be made to purchase the asset in full.
New accounting regulations from January 2019 mean that operating lease assets may no longer be considered off-balance sheet.
For more information on both finance and operating lease, please read our comprehensive article on the subject.
Neither of the above leasing structures give you ownership of the asset and in this way differ from the mobile phone contract model that is so familiar. There are other finance options available resulting in complete ownership of the asset, although the monthly payment is typically greater than either asset finance option suggested above and could also include substantial one-off costs at the start or end of the contract. Read more about hire purchase here.
Asset Finance Through Maxxia
As the finance options for businesses improve, the traditional model of outright purchase becomes less valid. Assisting with regular budgeting, as well as allowing you to retain capital and available credit for more, asset finance provides a method for modern business that will help your organisation grow.