Swimming With Sharks And Avoiding Future Scars (Pt 1)

Are there sharks in finance and can they be bad for my business? Perhaps a strange topic for an article written by a finance company – and even more controversial when the answer is Yes, says Samantha Arlow, Divisional Director, Paragon Bank Technology Finance.

But don't be shocked or put off by that headline statement. There are a large number of benefits to using asset finance to spread the cost of capital expenditure within your business.

As we all know 'Cash is King' so there is an obvious cashflow benefit right away. Add to that the ability to recognise a return on investment much sooner and the fact that it frees up other forms of funding for operational costs, and asset finance becomes a key part of the funding mix.

It can even be used to provide a cash injection into a business by releasing equity in existing assets. However, in order to maximise these benefits, any business considering finance of this type needs to be aware of the common pitfalls that can make what seems like a great idea, bad for business.

There are five key questions you should ask yourself before diving in and deciding that asset finance can benefit your business and ahead of signing the agreement. In Part 1 of this two part article, let's look at the first two questions.

1. Where is the money actually coming from?
Have you approached a bank/funder directly or have you engaged a broker to deal with this on your behalf? A broker will go to a wide variety of lenders to try to find you the best deal (or, in the case of some unscrupulous brokers, the lender that offers the broker the highest commission for your business!).

However, bear in mind that if you take out a number of agreements over a period of time, then you run the risk that these could be backed by a number of different funders, all of which will have different terms and conditions and different end of lease requirements. Safeguard your business against future confusion and unplanned cost by using a reputable finance provider and be clear that you want consistency between agreements.

2. What is the full cost of the finance?
When comparing finance offers, never compare solely on the interest rate. There are a number of ways to show the interest charge and you may not necessarily be comparing apples with apples.

Don't get too flustered by terms such as 'Internal rate of return', 'flat rate' or 'APR'; instead, simply tot up the sum total of all the rentals, plus front end and back end fees, then deduct the original equipment purchase cost. This will show you who is actually charging the least overall.

All finance providers will charge a documentation fee at the start and an 'option to purchase' fee at the end of the agreement. Both should be a nominal cost, but some funders may charge an additional rental (or in some cases three months' rentals) in order to transfer the title to you at the end of the agreement. If this was added to the original payment profile, it would significantly increase the advertised interest rate and take a hefty unplanned chunk out of your cash reserves.

Tune in next time for three more key tips and conclusions that could save your P&L.

www.pbtf.co.uk

This article is also available to read at BFV online here, page 44.

(JP/LM)