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A time to lease?

In the current environment, making construction businesses more profitable through effective investment is more important than ever.

More businesses are asking whether outright ownership is necessary or whether leasing gives a better deal with more flexibility.

Businesses are beginning to see the economic benefits of choosing to use the asset rather than actually owning it.

Cash is the lifeblood of any business, not just in times of economic uncertainty. Buying outright may mean construction firms are using up valuable resources that could be used to preserve cash flow or invested elsewhere.

Leasing enables firms to use the required asset without having to pay for it upfront and can reduce risk by
enabling the provider to guarantee a residual value on the asset at the end of the term.

In effect construction firms can use an asset for the term they need it with no disposal issues and the
agreement will often also include a maintenance package.

Leasing gives significant flexibility and at the end of the term if it doesn’t make good business sense to keep the asset or extend the lease - for example if it’s a niche piece of equipment for a specific project - firms can agree with the provider to sell the asset.

There is a wide range of asset finance options to choose from and one example is an operating lease. This is an arrangement where firms can lease the asset over an agreed period of time and banks build in a residual value for the asset which reduces repayments bringing cash flow benefits.

This option allows firms to match the operating lease to a specific contract, safe in the knowledge that they can budget fixed costs for the use of the asset.

Look for a financer that has its own in-house asset management arm and capability to adopt future residual
values on a multitude of assets from tools and equipment to cranes.

Leasing specialists can help guide through the many variations and options leasing can offer businesses, ensuring that firms find the most suitable product that meets both short term financial plans and longer term strategic requirements.

Another finance option is the well known hire purchase product, whereby repayments can be fixed or variable and firms own the asset once they have completed the payment programme or on the payment of an “option to purchase” fee.

The asset is treated as “on balance sheet” and is a better alternative to debt funding for an asset purchase as the provider does not normally require any additional security, such as charges over property or personal
guarantees.

Generally VAT has to be paid upfront on the total cost of the goods but lessors can consider funding these in various ways on a case by case basis.

As indicated, there are several funding options available and this is why it is important to engage asset specialists to help explain all of them so firms can make the right decision for their business and balance sheet.

Leasing options remain financiallyattractive against traditional debt funding and free up capital base for other investment opportunities.

We are speaking to more and more businesses about flexible payment structures that will make their asset
base work harder and help during these challenging times.

Sean Dixon is head of services and construction for the UK corporate banking team at Royal Bank of
Scotland

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