Current at: 29 July 2008
Plant & Equipment
Buying plant and equipment is just one option available to a business. BPN looks at some of the alternatives.
If you need to obtain finance to get more plant and equipment for your business, there are a number of options open to you.
Buying it
If you want to buy plant or equipment, you can do this through a:
- loan
- lease, or
- hire purchase agreement.
Borrowing the money up-front This can be done through a business loan. Depending on the size of the loan, the financier (whether a bank or other type of financier) may want some form of security, e.g. an interest in the asset or someone to act as guarantor.
Financing (or capital) lease This is where the asset is owned by the leasing company and leased by the business, which gets to use the asset during the term of the lease. There is an option to purchase the asset at the end of the term of the lease upon payment of a lump sum amount (usually called the residuary). Even though there will be provision for the item to be repossessed in the event of a default, additional security such as a director’s guarantee, may also be required.
Hire purchase This is where you rent the asset from the financier. During the term of the hire purchase, the business can use the asset but it is owned by the hire purchaser. Ownership of the asset is transferred to you when the final instalment is paid. Even though there will be provision for the item to be repossessed in the event of a default, additional security such as a director’s guarantee, may also be required.
Leasing or renting it
If you don’t want your business to be committed to purchasing an item of plant and equipment, there is the option of leasing it through an operating lease. This is where the asset is owned by the leasing company and leased by the business, which gets to use the asset during the term of the lease. The lease payments usually cover 100 per cent of the asset’s value over the term of the lease and there is no option to purchase the asset at the end of the term of the lease. Alternatively, you may be able to rent certain types of plant and equipment, such as computers.
The advantages of leasing or renting include not having to expend a large capital outlay and not being left with an obsolete piece of plant and equipment after a relatively short period of time.
The above information is a brief outline only. Specific advice on which financing option is best for your business should be sought from professional advisers.