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MACHINE TOOL FINANCE and LEASING

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We have put together this page to offer some advice on asset finance and leasing of machine tools and industrial equipment. At the foot of the articles a some links to UK based finance houses that specialise in the provision of asset based finance facilities.

Please call us if you would like to discuss the possibility of raising finance against exisiting assets or are looking to fund an asset aquisition.

Call Steve Halson on 01844 - 352329

Lease or Buy

Purchasing an asset is nearly always the most convenient method of acquisition. In some cases purchasing may be seen as impossible because of lack of funds in the budget. Financial Leases (described below) are better value than self financing and outright purchase if funds are not readily available elsewhere. Operational Leases may provide the best value when risks associated with technological change and servicing costs are taken into account.

Some different ways of obtaining assets are outlined below. This is a brief overview only, but more detailed information can be provided for specific cases, when required.

Each case is individual and has its own cost and tax benefits depending on the balance sheet of the company seeking finance.

Leasing Finance and Operating

A lease has been defined as "A contract between lessor and lessee for hire of a specific asset selected from a manufacturer or vendor of such assets by lessee" (Equipment Leasing Association). Ownership stays with the lessor. The lessee has possession and use of the asset over a period on payment of the specified rentals.

Leasing should be distinguished from hiring (including rental and contract hire). Hiring requires the user to select from specialised stock already held by the hiring organisation which usually charges a fixed tariff. Leasing enables the user to select from a maker or other supplier of the required asset.

A lease is negotiated, often on tailor-made terms, with the lessor who acquires the asset which has been chosen by the lessee. The unique feature of leasing is that it enables the lessee to use assets by making payments out of revenue. Office equipment (including photocopiers and fax machines) and furniture, cars and commercial vehicles, computers, machine tools, laboratory equipment and contractors' plant are likely candidates for leasing.

Some Advantages of Leasing:

(a) Costs are certain and are known in advance;

(b) The asset cannot be withdrawn once the contract is signed and its conditions complied with;

(c) No need to tie up capital in fixed assets;

(d) Allowances, depreciation and other calculations are not needed, since leasing is concerned only with rentals;

(e) Leasing provides a medium-term source of capital which may not be available elsewhere;

(f) Leasing provides a hedge against inflation as the use of the asset is obtained immediately - payments are made out of future funds and are made in fixed money terms, with real costs falling as inflation increases (this is of less

benefit at times of low inflation);

(g) possibility of immediate acquisition of cost -saving equipment.

Some Disadvantages of Leasing:

1. disposal of the asset before the end of the lease can carry an additional cost.

2. The asset is not owned.

3. Funds must be found to pay the lease throughout its duration.

FINANCE and OPERATING LEASES

There are two broad categories of leasing situations:

(i) Finance Leases

Here the lessor has no interest in the transaction beyond the supplying of finance. The lessor pays for the asset and becomes its owner. The rental paid by the lessee will cover the capital cost of the asset, a service charge to cover lessor's overheads in raising the lease, interest charges and some profit for the lessor.

The purpose of this type of lease is solely to provide finance to the lessee on the security of the asset. The lessee is responsible for maintenance and insurance.

(ii) Operating Leases

Operating leases are usually undertaken by manufacturers or suppliers as an aid to selling their products which tend to be highly specialised or technical. Here the asset is now always wholly amortised during the period of the lease and the lessor is responsible for servicing, maintenance and the updating of equipment. This type of lease enables the lessee to avoid some of the risk of ownership such as obsolescence. The University's policy in relation to Photocopiers is that equipment should be obtained on an operational lease under the terms of an official contract which calculates payments in terms of a price per copy.

COSTS

Once rentals are agreed and a contract signed they are fixed. However, the cost of rentals offered by a lessor will vary with interest rates prevailing at the time. At the completion of the lease period rentals reduce to a nominal annual sum, typically 5% of quarterly rental, until the asset ceases to be useful.

Hire Purchase

Also sometimes called Lease Purchase, the operation of such a contract is very similar to a lease. Payments are made at an agreed rate and for an agreed duration, but the important difference is that ownership of the asset does pass to the customer. For the slightly higher risk to the hirer, the costs are somewhat higher.

We are always keen to help with tailored financial packages and programmes. We do not have to be the supplier of the equipment. With our contact with several leading industrial finance companies we would be pleased to assist you with your requirements.

Contact Steve Halson on 07802 753474 or e-mail by using the link below.

Machine Tool Finance and Asset Based Funding

Below are some of the companies offering UK based asset funding. These companies are listed for the convenient information of our visitors and an inclusion does not form the basis of any recommendation by Mid Bucks Machine Tools Ltd or this website.

Category: Personal Finance

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