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Recently we published an article about the main types of finance products available in the United Kingdom. You can read that article here.

We received a lot of positive feedback from the people who read the article. The main question they raised regarded the end of term treatment of the asset on a finance lease.

Therefore, we thought it would be useful to put together some information relating to how finance leases usually work at the end of term.

As you may expect, all finance companies have slightly different methods for treating the end of lease with their customers based on their own accounting principles, but the usual practices are listed below.

• The hirer may enter a secondary hire period and continue the lease.
• The hirer can be appointed as the ‘sales agent’ by the finance provider and is then able to sell the asset to a third party on their behalf.
• The asset can be returned to the finance provider.

Continuation of Lease

This option usually has the lowest cost associated with it. As the asset has already had its capital outlay covered, continuing to lease an asset can be the most attractive option in terms of cash flow.

Your initial agreement should allow for your lease to continue at the end of the term, and also should show the value of continuing to do so. A finance company would normally only be looking to cover their admin costs at this stage, and all options would still be open to you in the future.

This is a great option if you are undecided about the next step for the business or the asset. You can effectively tread water for a period at your discretion, and then decide if you wish to take either of the other options or continue with the lease.

This is especially good if you potentially have a buyer lined up for a sale and need time to get the sale through. Or if you are looking at other options for equipment and wish to use the asset leased as a stop gap until you have decided.

Sales Agent Option

In our experience this is how the process is designed to work.

• The finance provider appoints the lessee to act as a sales agent to dispose of the equipment on the lessor’s behalf.
• The lessee sells the asset for Fair Market Value to an unconnected third party.
• Most lessors will be able to introduce the lessee to an unconnected third party if needed.
• Once the sale is complete, the hirer receives a pre-agreed percentage of the sales proceeds back from the lessor, often referred to as a “rebate of rentals”.

This is a great option if the lessee wants to be able to sell the equipment in the future and generate revenue from the proceeds. The lessee could alternatively agree their own commercial arrangement with the third party to take title if required.

Return

Returning the asset could have benefits for your business if you are looking to continually change your equipment, or if you have decided to take the business in a new direction and have no use for this equipment anymore.

On your agreement you will have the ability to return, however there could be costs involved in this option as you will be giving an asset back to a finance provider, who may not be able to handle it efficiently.

Ultimately the benefit of finance lease over Hire purchase is that generally the upfront capital required is a lot lower, and you have full flexibility and control with the asset at the end of the term.

We hope that you found this article useful, and as always if you have any questions, please just speak to us.

James, Paul, Theo, George, Oli and Liam

The Ninaksi Team

Some further reading and information (not affiliated or endorsed by Ninkasi Rentals) can be found by following the below links:

https://www.ukbusinessforums.co.uk/threads/finance-lease-for-van-ending-what-do-do.345456/

https://www.advanceleasing.co.uk/services/end-of-lease-services/

https://www.addleshawgoddard.com/en/insights/insights-briefings/2019/tax-and-structuring/vat-update-fmv-leases/

https://app.croneri.co.uk/feature-articles/buy-hp-finance-lease-or-operating-lease-introduction-accounting-and-tax

https://maxxia.co.uk/asset-finance/finance-lease/

https://www.bermans.co.uk/asset-finance-publications/article1/

Please note that all information contained within these articles is produced as summary of our experiences and does not constitute financial advice. Any information contained within third parties’ documents are not attributable to Ninaksi Rentals and must be read at your own discretion. Ninkasi rentals always advise that independent financial advice should be taken before signing any financial documents.

We thought we’d do something a bit fun in the run up to Christmas and share what we’ve been enjoying over the festive period.

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Day Two – George is drinking a Seriously Mixed Up Sour from Beatnikz in Manchester

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The guys at Beatnikz are really great and show a real passion for all of the beer that they brew. Their sours are both full bodied but also fruity, George says it tastes like drinking a big bag of grapes.

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Favourite Christmas Food – Pigs in Blankets

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Day Three – Paul’s dessert beer of choice is Milk Stout from Wiper & True.

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This beer is smooth, creamy and has so many wonderful flavours. Your mouth senses the chocolate and vanilla as it flows across your tongue. Not just a great beer, this is award winning stuff from the boys in Bristol.

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Favourite Christmas Present ever – Action Man with a parachute

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Day Four – Ollie is drinking one of the Christmas specials from BrewYork (Fairy tale of BrewYork).

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Ollie loves a great dark beer, and he thinks the guys at BrewYork brew some of the finest dark beers in the country – Ollie says it tastes like pudding in a cup.

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Are your presents before or after Christmas dinner? – Just continuous, they never stop, it’s all about the receiving.

Day Five – James is drinking Crash from Salt!

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This is a regular beer in James’ house, he loves the fruity nature that the hops bring to the beer and the velvety mouthfeel that the beer creates. As you can see from the glassware, he’s a bit of a fan!

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Favourite Christmas Memory – Christmas’ in North Wales with my whole family as a kid

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Day Six – Liam is drinking Northbridge from Thornbridge, which is a 7.2% mountain IPA.

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It is hands down Liam’s all time favourite beer, it is smooth, easy drinking and tastes amazing.

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Favourite Christmas Movie – Die Hard

At Ninkasi today, dressed up in our Christmas jumpers and Santa hats, today we had our last review of 2020 ahead of the Christmas Holidays.

We also had the opportunity to play with one of our rental products, the Pilot Brew Kit, and create our very own Christmas beer – a 7.2% ‘Big Bold Stout’.

George is a brewer by trade and our operations manager. We had a Pilot Kit sitting in the warehouse, so we thought why not use it to bring some Christmas cheer to everyone and in the process, learn all about the trials and tribulations our customers go through when brewing themselves.

Have fun out there guys, and remember….. keeeeeeep brewing!!

The Ninkasi Elves

Ninkasi Rentals and Finance have just helped SALT complete their new tank farm project. SALT (who are part of the Ossett Brewery Group) are currently in high demand among their customer base, and several large orders have meant that they needed in increase their production capacity swiftly and cost effectively.

SALT approached Ninkasi for a financially viable solution to increase their production capacity with minimal capital outlay while still having the ability to determine how they wish to handle any future transactions with Ninkasi. This meant that Ninkasi provided the upfront capital for the project while SALT received the tanks that they required to their exact specification.

Dr. Nadir Zairi, Managing Director at SALT said:

“It was a pleasure to work with Ninkasi on this project for our business. SALT is always looking to work with professional and supportive suppliers and found that the ethos and customer service within Ninkasi really matched our own.

We are currently going through a significant growth phase and as such needed to increase our capacity, with the current economic climate and uncertainty in the market we felt that a rental solution provided the best possible capital advantages while also protecting the business from any unknown market forces which could impact and would be beyond our control.

We are very happy with our choice and the service and value provided by Ninaksi”.

James Lewis, Managing Director at Ninkasi Rentals said:

“The tank farm project at Salt has been smooth sailing since day one. The vision that Nadir and his team have for the business is very clear and having known the business for many years, providing the capital for their expansion was something that we were always happy to support.

We have found that many of our customers have moved into expanded small pack production during the recent pandemic, and as such Ninkasi have been able to provide additional tank capacity for them quickly and at a time to really help their business thrive in uncertain times. The flexibility of our rental offering is also very attractive to our customers during these uncertain times as it allows customers to grow with demand, but not necessarily risk the upfront capital of outright purchase.

The 9 x 60hl tank farm at Salt is representative of how we can work alongside a customer to ensure that their ambition and ability to meet their customer demand is done both cost effectively and smoothly”.

We’re on the cover of the Autumn/Winter issue of the Brewing & Beverage Industries Business magazine! Read our article about how we’ve recently helped Salt Beer Factory complete their new tank farm project.

https://brewingbusiness.co.uk/read-the-latest-issue/?fbclid=IwAR0qPT3j-HJ0yjSumRalhbypITNRoRo8mbEo3ZjqX3oqw5Ii50Z34Zc5tXk

A lot of our customers ask us how equipment finance works in the industry and the difference between the various finance options.

There are quite a lot of myths and misunderstanding, below is a simple guide which we hope will help you better understand the terms that finance companies use, and importantly the difference between them.

There are three main finance options offered in the United Kingdom, we have listed them below.

Operating Lease

With an operating lease, the lease will normally run for less than the economic life of the asset, as such the finance company (the lessor) will continue to have an economic interest in the asset. It is therefore expected that the asset will have a significant residual value at the end of the primary lease period.

The customer (lessee) gets to use the asset over the agreed lease/rental period, but the payments made do not cover the full economic life of the asset. As opposed to a finance lease where the full cost of the asset is charged over the life of the agreement.

An Operating lease is likely to also include other additional services, some examples of which would be realising procurement risks, the stocking of goods ‘off the shelf’, delivery/installation of items, insurance and replacing faulty goods from stock.

At the end of the lease period the lessee may have all/any of the following options:

• Return the asset to the finance company
• Continue to rent the asset in terms agreed in an extension period
• Negotiate a custom deal with the finance company

With an Operating lease the assets remain on the lessor’s balance sheet and the rental is treated as a cost item in the lessee’s profit and loss.

A rental agreement is a form of Operating Lease.

Finance Lease

With a finance lease the finance provider (the lessor) buys a specific asset and rents it to the hirer (the lessee) for an agreed period.

The finance lease commits the lessee to make payments for the cost of the asset. As the asset is still owned by the finance company, the lessor manages the VAT and accounting principles for the agreement.

At the end of this period of leasing (usually called the primary hire period) there will normally be several possible options open to the hirer.

• The hirer can sell the asset to a third party on behalf of the finance provider.
• The asset can be returned to the finance provider
• The hirer may enter a secondary hire period, typically for a “peppercorn” amount

Note – A lessor cannot give the lessee a documented right to purchase the asset at the end of the lease for a pre-determined value. This would change the lease into a hire purchase agreement changing the VAT and accounting treatment with negative cash flow implications for the lessee.

For more information about end of term options on a finance lease, please see this article.

Hire Purchase (sometimes called lease purchase)

The point of a hire purchase agreement is that the asset is on hire from the finance provider until the final payment, at which time the title passes to the hirer. As it is understood between both parties that title will pass to the hirer at the end of the initial agreement, a hire purchase agreement is treated as a purchase for tax purposes, accountancy, etc.

With a hire purchase agreement, the hirer is therefore required to pay all the VAT due on the asset purchase up front, in addition to any deposit required by the finance company.

The hirer must treat the asset as owned, so it must be shown on its balance sheet and depreciated in line with its usual accounting standards. Of course, this this has implications in terms of other borrowing or covenants that the bank may have on the business.

We hope that you found this article useful, and as always if you have any questions, please just speak to us.

James, Paul, Theo, George, Oli and Liam

The Ninkasi Team

You can read more about different finance products by following any of the links below:

https://www2.deloitte.com/uk/en/pages/audit/articles/ifrs-16-leases.html/

https://www.ukbusinessforums.co.uk/threads/finance-lease-for-van-ending-what-do-do.345456/

https://www.advanceleasing.co.uk/services/end-of-lease-services/

https://www.addleshawgoddard.com/en/insights/insights-briefings/2019/tax-and-structuring/vat-update-fmv-leases/

https://app.croneri.co.uk/feature-articles/buy-hp-finance-lease-or-operating-lease-introduction-accounting-and-taxhttps://maxxia.co.uk/asset-finance/finance-lease/

https://www.bermans.co.uk/asset-finance-publications/article1/

Please note that all information contained within these articles is produced as summary of our experiences and does not constitute financial advice. Any information contained within third parties’ documents are not attributable to Ninaksi Rentals and must be read at your own discretion. Ninkasi rentals always advise that independent financial advice should be taken before signing any financial documents.