Finding the right type of finance for your business investment – the Swedish connection
Usually when we arrive in a foreign city, there’s a queue of taxis at the airport and either a fixed-price fare or a standard metered rate. Arriving in Stockholm is different. Drivers from the three largest taxi companies wait in separate long lines outside the airport terminal. Taxi fares aren’t regulated, so it’s important to agree a fixed price or to be happy with the rate on the meter.
Arranging finance for your business investment is a little like using a taxi in Stockholm. There are a number of different types of finance to choose from, plenty of providers for each type, and it’s important to understand the cost.
The main types of finance available for new business equipment are:
1. Bank loan
The simple way to raise cash to buy new equipment
- Borrow a set amount of cash and buy the asset outright
- Repay over 1-5 years
- Available on fixed or variable interest rates
Often the easiest and cheapest way to obtain new equipment.
2. Asset finance
Hire rather than buy the equipment using a form of asset finance
- Choose whether to have a purchase option at the end of the hire period
- Pay over 3-5 years, in line with the expected useful life of the equipment
- Fixed monthly payments
3. Alternative finance
Use the power of the internet to raise money from private investors using peer-to-peer or crowdfunding websites
- Either borrow a set amount of cash and buy the asset outright or take out a hire purchase agreement
- Repay over 1-5 years
- Fixed interest rate plus a setup fee
Maxxia’s advice to small and medium-sized businesses is to consider all three options, even if only briefly, and focus on the total cost.
You may already know whether your main bank will offer a term loan and at what rate. If not, some banks publish their interest rates, or you can access one of the financial services comparison sites.
For most business equipment it should be possible to find an asset finance option including a lease or hire purchase agreement. For investments up to £100,000, it’s often best to speak to a business finance broker to get an indication of the likely cost. An asset finance broker, which has access to a wide range of funding options will be able to search the market on your behalf and find the most appropriate and competitive deal for your particular requirements.
For larger investments, you can also call a finance company directly. Maxxia is a hybrid organisation being able to provide funding directly as well as acting as a broker to search the market to find you the best deal. We are always happy to discuss finance options even if you are at a very early stage of thinking about your investment. Contact us here for any support or information you require.
There are several types of asset finance, so to get the best deal it’s important to consider which you need. If you want to own the equipment after the minimum hire period set out in the agreement, select hire purchase. Some companies call it “contract purchase” or “lease purchase”, or it’s a “lease with a purchase option”. Remember there’s likely to be a balloon payment – that’s a final payment that is larger than the previous monthly or quarterly rental payments – at the end of the term of the lease. There may also be a fee. For these reasons, look at the total cost including the purchase option.
If you are confident you won’t need the equipment after the minimum hire period, select a lease without a purchase option. It might be called “operating lease”, “contact hire” or a “fixed term rental”. This might be up to 10% to 20% cheaper than hire purchase because the equipment is normally returned to the finance company at the end of the agreement. It’s usually possible to extend the lease at the same monthly rate as charged up to that point. Sometimes there is a ‘bargain’ or ‘peppercorn’ low rate for an extension option – but that needs to be agreed from the outset, and it means the total cost is likely to be the similar to a hire purchase.
It’s also important to compare different asset finance options based on the period you expect to need the equipment for. A longer finance agreement will have lower monthly or quarterly charges but that’s not much use if you are left having to pay for equipment when you are ready to upgrade.
At Maxxia, we can help you to understand all of the different asset finance options and find one that suits your needs.
Alternative finance providers bring a new twist to the business finance market. Rates start at around 6% and are often in the 7% to 10% range, plus a one-off fee of around 5% of the value of the investment. Many business finance brokers can also discuss this option with you.
When comparing the main types of finance available, it’s worth asking some basic questions:
- Is it better to use the businesses’ own cash rather than borrow?
- What is the headline interest rate?
- What additional fees and other costs are there?
- Who owns the equipment at the end of the finance agreement?
- What happens when I no longer need the equipment?
- What are the tax implications?
In summary there’s plenty of choice in the business finance market, and that choice can lead to healthy competition and good service. Like choosing a cab in Stockholm, it’s important to know what the options are and the approximate costs to help ensure you get a good deal. Here at Maxxia we are ready to help – even if that means we might (just occasionally!) suggest you could get the best deal by choosing a solution from elsewhere. Our mission is to make long-term relationships with businesses and support you to make successful investments. Skål!