Transport, Storage, and Food & Drink Manufacturing are amongst the top fastest growing industries in the UK right now. And with great growth, comes great investment - specifically in the capital equipment on which these industries often depend. But what is capital equipment?
What is capital equipment?
Capital equipment includes items which cost more than £5000 including VAT. They are often one of the largest investments of a company. From forklifts and trucks, to cherry pickers and cranes, capital equipment is an important growth and success factor. After all, you can’t expect to transport goods with no vehicles fit for the job. Or optimise a production line without the most efficient technology and machinery available.
Despite what’s set to be one the toughest economical climates in decades, manufacturers of all sizes are planning to increase investment in capital equipment by 33-40% over the course of 2023 (Make UK’s Executive Survey 2023).
Below we explore the 3 options for investing in capital equipment; leasing, buying outright, or utilising asset finance. Read on to find out which is best.
1. Buying capital equipment outright
If your business has the cash to spare, buying capital equipment outright with your own funds may be an option.
Advantages:
Fully own the equipment and its equity
No commitment to monthly payments
Pay the value of the asset, with no interest
Disadvantages:
Significant dent in cash flow which may take months to recover from
May need an overdraft or bank loan which can add to initial costs
Entirely responsible for repairs and maintenance costs
Value of the asset depreciates over time
2. Leasing capital equipment
Leasing is where you rent equipment for a regular fee. At the end of your lease term you return the equipment to the supplier.
Advantages:
No capital investment and you can tailor payments to your cash flow capabilities
Not responsible for maintenance and repair costs, in some cases
Usually accessed quickly with modern delivery methods
Easy to upgrade when needed
Disadvantages:
Do not own the equipment or have access to its equity
Tied into lease term agreements with potential fines for early termination
Potential end-of-lease charges depending on contract
3. Buying capital equipment with finance
Utilising an asset finance facility means the lender buys your item from the supplier and you repay the lender over a fixed period of time.
Advantages:
Minimised risk to cash flow as lender takes on capital expenditure
Lower interest rates than other less-specialised loans and overdrafts
Terms can be tailored for seasonal businesses
Disadvantages:
Pay interest on monthly payments
Committed to a lender agreement
Responsible for repairs and maintenance costs
Value of the asset depreciates over time
What’s the best way to invest in capital equipment?
There are pros and cons to each option, so which is best for your business? It is key to consider:
The state of your accounts
The period you need the equipment for
How soon the next version of the equipment is likely to be released
With a rough economic outlook for 2023, even businesses with cash in the bank would be unwise to spend their own funds on capital equipment. These funds would probably be better spent in other areas of the business for which not as many options are available.
And when it comes to leasing vs asset finance, it ultimately depends on what you need from your equipment.
If you’re investing in equipment which is upgraded often, like more digital-based assets, leasing would offer the best option for regular upgrades to the best version. The same goes for if you only need the equipment short term; there may be little point in purchasing it.
However, for more traditional equipment (like a truck or machine) that you will use for years at a time, asset finance would be the best option. A specialised type of finance made for purchasing equipment your business needs to grow, asset finance offers competitive interest rates and allows you to spread the cost over a time period to suit you - which can even be tailored for seasonal businesses.
To find out more about investing in capital equipment for your business, talk to us today at Coria Commercial Finance. Get in touch here.