Asset-Backed Recovery?

 

As SMEs and the broader economy enters a period of recovery from the pandemic, the importance of its assets to a business are in sharp focus:

·       Investment in assets facilitates growth

·       New assets help to meet the needs and changing demands of customers

·       Keep up with the volume of demand by increasing capacity with additional assets

·       Easy to quantify the economics of the investment in assets: Additional business generated – Cost of asset = Return On Investment

Asset Finance conserves cash in your business now, allowing you to budget for the months and years ahead.

There is now the additional incentive to invest in new assets from the Super Deduction tax relief scheme that the government announced in the budget – up to 130% of the cost of qualifying new assets in your business from 1^st April 2021 to 31^st March 2023 can be offset against the taxable profits of your business for Corporation Tax in that tax year.

Leasing Finance and Hire Purchase facilities are treated differently for tax purposes in your company’s accounts - I’d recommend discussing the best approach with your accountant, and government guidance on the Super Deduction scheme can be found here:

https://www.gov.uk/guidance/super-deduction

Some additional financial reasons for companies to use Asset Finance:

·       Frees up capital, tangible security and cash flow to be deployed for other purposes

·       Leasing Finance can avoid the issues of depreciation of the asset

Every Asset Finance lender will be comfortable with understanding and pricing different sectors or types of assets, which can broadly be split into Hard and Soft categories:

Hard Assets

Normally higher value assets, with longer retention of value:

·       Heavy goods vehicles, light goods vehicles, commercial vehicles and cars

·       Agricultural machinery

·       Construction machinery

·       Manufacturing machinery and plant

·       Recycling processing equipment

·       Printing presses

Soft Assets

Normally Leased and low residual values:

·       IT (Hardware and Software)

·       Audio visual

·       Furniture, fixtures and fittings

·       Security systems

·       EPOS (Electronic Point Of Sale) card terminals

For Asset Finance, expect an asset that holds a higher residual value to require a smaller deposit and minimal additional security, and vice-versa. 

Used Assets

Asset Finance can be used to purchase second-hand assets (for example, used vehicles or refurbished IT hardware); however criteria on age of the asset at the end of the finance term may apply, and the lender is likely to independently value the asset at the commencement of the facility.

Different assets, and a company’s situation, could determine the type of Asset Finance facility that would be suitable:

·       Leasing Finance: Your business doesn’t own the asset but agrees a lease usually for a fixed term and payments

·       Hire Purchase (HP): This allows your company to purchase an asset over an agreed term with agreed regular payments

·       Refinance: (or ‘Sale and Lease Back’) Your company may own assets that are either unencumbered or partially financed - lenders will fund your business against a proportion of this equity

·       Operating Lease: A specialised form of Leasing Finance where your company requires the asset for a specific term or project

·       Business Contract Hire (BCH): Exclusively used in the leasing of business vehicles, contract ‘options’ can include sourcing, maintenance and insurance 

Adding the new tax relief incentive to the already strong case for investing in assets for your business – growth potential and the ability to capitalise on new opportunities among others - should mean that your next step is to decide how best to fund the asset.

Make your company’s recovery Asset-Backed.

Mark Grant, April 2021.

info@fiduciacommercialsolutions.co.uk                      01636 614 014

The Super Deduction Corporation Tax Relief Scheme

 

Companies of all sizes can benefit from the Super Deduction – it could pay to invest in your company’s growth in the next two years.

From April 1 2021 for 2 years companies can offset 130% of qualifying spending on plant and machinery against their taxable profit in that first year.

SMEs’ deposits rose 20% to £252bln in the pandemic; the Super-Deduction encourages businesses to spend, in turn driving economic activity and productivity.

•         Applies to all asset types, New and not Used
•        No limit on purchases
•        Cash, loans or Asset Finance purchases
•        Company cars not included
•        Claw back may apply to assets sold during the period

Example: Spend £50,000 on assets, offset 130% against taxable profits = £65,000

At 19% Corporation Tax rate = Tax Saving of £12,350

(£50,000 x 130%) x19% = £12,350

Take your accountant’s advice for your business, but it could be worthwhile re-considering plans that had been shelved during the pandemic, or bringing forward plans?

Assets could drive growth in your business and the economy forward again.

Guidance: https://www.gov.uk/guidance/super-deduction#history

Mark Grant, April 2021.

info@fiduciacommercialsolutions.co.uk                    01636 614 014

Key Facts: The Recovery Loan Scheme

 

Launched: 6^th April 2021 for applications

Launched with 18 accredited lenders, expecting up to 100 lenders to participate

In summary the RLS is a funding solution “where finance is not available under a normal commercial basis”.

The scheme replaces the BBLS, CBILS and CLBILS schemes:

·     Term Loan funding starts at £25,001 up to 6 years
·        Invoice and Asset Finance starts at £1,000
·        Scheme limited to £10m per company, or £30m per group

Scheme is a “top up” to existing BBLS and CBILS loans – total amount that can be accessed under all schemes guided by:

•         2 x wage bill or 25% of Turnover for 2019 or justified 18 months cash flow requirements

For example, if ABC Ltd had turnover of £800,000 in 2019, then their maximum total Covid support schemes’ borrowing could be £200,000. If they had already accessed a CBILS loan for £100,000 then, subject to credit assessment, they may be eligible for £100,000 funding under the Recovery Loan Scheme.

Some scheme rules are the same:

• NO PG taken on loans up to £250k
• Borrowers private residence cannot be taken as security
• 80% Government guarantee to the lender

Some changes to the rules:

•          No interest free period for the borrower
•          The business responsible for all fees associated with the loan
•          No automatic payment holidays up front for all borrowers
•         No minimum turnover or time incorporated

Proposals will be considered for all sound business and economic reasons – every application to be fully credit assessed. 

Mark Grant, April 2021. 

info@fiduciacommercialsolutions.co.uk                 01636 614 014

Bridge To Let – One Step Across Two Conveyance Hurdles

 

It is very common now to see our landlord clients acquire property that requires conversion work – either commercial to residential or single dwelling to HMO – or refurbishment and modernisation to get it ‘tenant-ready’.

Beyond maximising rental yields, landlords are adding immediate capital value to their long term investments by completing this work after purchase.

The traditional and well trodden path for landlords through their limited company property vehicles (SPVs) can be broken down into two distinctly separate stages:

§  The purchase and conversion or refurbishment is funded via a Bridging Loan

§  On completion of the works, with the property now in a habitable state for tenants, a Buy To Let mortgage is put in place which refinances the Bridging Loan

Depending on the funds that the landlord has to put into the first stage, some Bridging lenders will only advance a Bridging Loan to acquire the property, while others can offer a ‘Refurbishment Bridge’ which can combine an advance on the purchase with a contribution to the ‘cost of works’ for conversion or refurbishment.

Our well trodden path has two separate conveyance stages, the first of which is when the property is purchased.

The landlord will provide a ‘schedule of works’ to illustrate what will happen once they acquire the property, to be considered alongside the valuation of the property in its current state.

The surveyor provides the Bridging lender and landlord with one valuation of the property in its current state, for purchase, and a second valuation estimating the value of the property with completed conversion or refurbishment work (the ‘Gross Development Value’).

The Bridging lender can then confirm the economic viability of the project, as well as the amount of the ‘cost of works’ that they would be willing to lend, if that was a part of their product.

As the landlord reaches the end of stage one, when the property is habitable by tenants following the completion of the conversion or refurbishment work, they refinance the Bridging Loan with a limited company Buy To Let mortgage.

These products can offer up to 75% LTV (subject to eligibility) and should clear the Bridging Loan plus funds returned towards the original purchase deposit and ‘cost of works’.

At this stage the client has added capital value to their investment, and likely enhanced their rental yield, but the fly in the ointment is that they need to go through a second conveyance stage in full at this point to secure their second and long term finance vehicle – the Buy To Let mortgage.

We recognise that every landlord and client are in a different position, and that having an option on whether to refinance or to sell at the point of completion of the conversion or refurbishment works may suit them.

Many others though are committed from the outset in the long term nature of the investment, and commonly complain about the time and cost of going through essentially a second purchase process on the one property – this represents an opportunity cost to them potentially as well as an additional financial cost.

Product innovation – the single conveyance in a ‘Bridge To Let’

Traditionally commercial finance is not an area associated with lenders adapting and innovating their product offerings based on client requirements and feedback – but the Buy To Let and property investor space is bucking that trend.

Cue the Bridge To Let offering, available now from several lenders and very likely to increase in popularity as landlords become aware of it.

In a nutshell, the landlord completes a single conveyance at the point that they purchase the property – a surveyor’s visit and solicitor’s work confirmed with dual underwritten offers of both the Bridging Loan for the conversion or refurbishment stage, and the subsequent Buy To Let mortgage, which the client rolls into once the works are completed.

The key here is that both finance facilities are arranged with the same lender up front, under a single application and conveyance process.

The lender would confirm completion of works, and the property being habitable for tenants, much in the same way that their agreed QS would sign off works completion during the project for staged payments – critically the completion of the works does not signal a second and separate application and conveyance stage.

§  A single lender providing dual offers at the start of the process – for both the Bridging Loan and the Buy To Let mortgage

§  Significant time saved and reduced costs from not having a second conveyance stage for the Buy To Let mortgage

§  Confidence of knowing your costs, with some lenders able to fix the rate of the Buy To Let mortgage at the initial dual offer stage

‘Time is money’ is particularly true for landlords if that time is between the property being habitable at the end of the completed works, and their longer term finance being in place through the Buy To Let mortgage – that time often being the second conveyance! 

We source the most suitable solutions for our clients’ requirements from our whole of market panel of lenders. By listening to the whole set of requirements we can identify the most suitable solution for our landlords – which could include Bridge To Let moving forward.

Mark Grant, April 2021.

info@fiduciacommercialsolutions.co.uk / 01636 614 014