Buying something outright with cash you already have at hand may seem more sensible than leasing it and paying extra or simply renting it when needed. Jake Bickerton talks to media finance specialists about when it’s best to lease, buy or rent
If your company is in the rarefied position of having a reasonably healthy bank balance and you need to purchase something for your business, you should just go ahead and buy it. Right?
Well, not really. Leasing – either lease purchase or lease rental (more on this later) – is likely to be a more beneficial route despite costing you more. And even though, in the case of lease rental, you don’t even own the item at the end of the lease period, it could still be a better option than buying it using available cash.
The choice to lease rather than buy upfront may at first appear illogical – why should you opt to spend more when you’ve cash in the bank, or, worse still, opt out of owning the product altogether? – however it’s an eminently sensible move from the point of view of cash flow and tax benefits. In short, spending your cash now could take your company into very choppy waters further down the line.
To buy or not to buy
"85% of all FTSE top 100 companies lease their vehicles and PC infrastructure even though they can well afford to buy it all outright for cash out of their back pocket," explains Medialease md Paul Robson. "This is because it’s always better to have assets that are employed in revenue generation for the company being financed, with the asset paying for itself directly in income verses the cost of investment." Fellow media finance company md, Azule’s Peter Savage, adds: "If you’re opening a post house or expanding with new equipment, the advice we try to get over if you’ve £100-200k in the bank and are thinking about paying cash for something when credit is tight, is what happens when you need to get hold of more money?" he says. "A typical scenario is you aim to open your post house in July, but this slips to August, then you get a reasonable amount of work from September to November but after this it starts drying up and by January and February things are going awfully. Your cash flow is up and down all the time and you could find yourself in real trouble if you’re not careful." Steve Bolton, director at Barclays Corporate agrees: "A hire purchase scheme spreads the cash flow burden of the purchase and conserves working capital – this is particularly valuable to businesses, like many in the media sector, that are affected by seasonal peaks and troughs in trading activity."
Soho Media Finance md John Edwards is another to recommend a leasing option rather than buying equipment upfront: "If you can pay for something upfront, it doesn’t mean you should – you have to be sure you won’t have better uses for your finance. It depends on the individual and if they want to sail close to the wind. You pay a bit more on interest with leasing but you may feel more comfortable working that way. It’s a safe feeling knowing you have money in the bank. You pay staff monthly so why not do the same with your kit?" Gareth Wilding, sales and marketing director at Fineline, sums up by saying: "If you’ve got the cash to buy then use it as it’s always cheaper to do this. But only use it if you have sufficient cash reserves; never use working capital."
If you decide to go down the leasing route, there are multiple options available from finance companies, depending on your circumstances. The first option is to lease purchase, which is paying for equipment in instalments over an agreed term after which the item is yours, following the payment of a nominal fee.
The next option is lease rental, which is likely to be more cost effective than daily hire charges from a hire company. After paying rentals over an agreed term, you have the option to either return the equipment, continue renting it at a further reduced cost or selling the equipment on behalf of the financier whereby you retain a pre-agreed percentage of the sale proceeds.
There are a number of additional leasing options too, including an operating lease, for which the finance company underwrites a future value in the equipment, so the rental cost is calculated on a reduced amount – you lease the equipment for as long as you need it then the ownership returns to the leasing company.
Furthermore, there’s a contract lease option, which is similar to the operating lease but also includes maintenance cover for the product too.
Which of these options you choose depends on whether you want to own the product at the end of the lease agreement. It isn’t always desirable to own the ‘asset’ from a tax and accounting point of view, particularly if the value of the equipment at the end of the lease period is relatively small. "Typically production companies and post houses will opt to fund a new piece of equipment using a hire purchase scheme. This gives complete flexibility at the end of any financing term and is particularly relevant as generally the life expectancy of media equipment will be longer than the financing period," explains Barclays Corporate’s Bolton. "Having said that, there are a number of production companies who prefer to structure the financial product around the specific lifecycle requirements of each asset. Commonly referred to as operating leases, this funding arrangement is particularly valuable for production and post production houses whose assets are refreshed and disposed of more regularly."
Azule’s Savage believes "it’s economically sensible to lease purchase as you own the asset at the end of the three years. If the product lasts more than three years, everything after the three years is free." However, he adds, "It depends how often you need to change kit – creative people often want frequent technology changes whereas the technical guys like to keep the kit for longevity – if you lease hire you can change equipment whenever required."br />
Meanwhile, Clockwork Capital’s director Geraldine Scher points to the tax benefits of lease rentals: "It’s a tax efficient way to get hold of equipment. If you buy something outright it has to be capitalised and depreciated within the accounts system. Rental is an operating cost therefore it’s a profit and loss item not a balance sheet item and a simpler accounting process."
Does renting make sense?
One alternative to buying or leasing is renting the equipment from a hire company. This makes sense in some scenarios, as Wilding explains: "A post house will mostly be renting high-end decks as they can be difficult to justify buying. An SRW-5500 machine costs £65-80k, while the rental costs are £300-350 a day. So even after 100 days of rental use you’re not even close to the purchase cost." But, adds Azule’s Savage, "The lease purchase rate of the SRW-5500 is around £1,990/month over three years, so if you’re going to use it for more than six days a month and can expect to be doing so for the foreseeable future, you’ll be spending £2-3k a month on rentals and be better off leasing it."
A more problematic decision has to be made when it comes to whether to purchase or rent cameras. "Cameras are slightly more difficult thanks to all the formats now. Unless you have contracted work on a single format it might still be best to hire different formats to suit the production, and not buy a single format and have to force it onto a production," says Savage. Wilding adds that, "If you have a good idea of your future bookings, you can do a simple equation working out how much you would pay on hire charges per month versus the lease purchase charge per month, but future demand is not always clear." Similarly, Clockwork Capital’s Scher says: "If you’re a production company with a nine month production schedule, rentals can be high. If you think there’s a chance the series could be re-commissioned or if there are other series the camera could be used on, it’s worth investing. It’s up to individual companies whether they feel they want to reduce operational costs by bringing the equipment inhouse."
Where to go for money
Historically, banks have been the first port of call for companies seeking finance, but a combination of limited availability of credit from banks and the often non-mainstream leasing requirements of media companies mean a media specialist financier is likely to be a better first port of call for production companies and post houses. "You should start by going to a specialist media finance business that will understand your needs," says Clockwork Capital’s Scher. "They understand why a production company, post house or freelancer needs equipment, and understand the kit and residual market and are better at thinking outside the box, whereas banks focus on the very tangible assets of bricks, mortar and so on. Banks are less imaginative in the way they approach what they do."
On top of this, Scher adds that "businesses shouldn’t have all their eggs in one basket – separating out asset finance from banking is a good idea as it provides businesses with far more flexibility.” Medialease’s Robson echoes these points: "A customer’s bank will generally not understand the equipment we are funding – Medialease, like others such as Azule and Fineline, truly understand the market, the equipment and the future values of the equipment. Production companies or post houses need to come to a specialist outfit like us to get funding as currently banks are struggling to lend to the SME market unless the company is really strong in balance sheet terms and highly profitable." Azule’s Savage adds: "You can be cold called by leasing companies left, right and centre, but they don’t necessarily understand the industry. There are a number of well-known, long-established people who can give you the right advice," he says. "Also, using a third party outside your bank is very useful. Banks will cross capitalise their debt, so if you’ve bought your building through a loan, have a bit of an overdraft and are also leasing equipment through your bank, they are providing you with everything. If your bank increases the rates or decides to stop lending, you’re in trouble. If you’ve a different lender and a third party source of funding you’ve a far better mix of debt."