Tag: Article
End of Lease – Finance Lease
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://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.
Ninkasi Christmas Countdown
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.
Day One – Theo is drinking Raspberry and Pomegranate Gin Liqueur from Bristol Distilling Co
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“I’m not the biggest beer drinker so glad that our equipment can be used by other drinks manufacturers. A great pink gin and can be mixed with Prosecco for a cheeky festive cocktail, can’t wait to try more from their range!”
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Favourite Christmas Song – All I Want for Christmas is You – Mariah Carey (obviously!)
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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).a
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.
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Day Five – James is drinking Crash from Salt!a
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.a
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
Types of Finance Agreements
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.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.
Our New MD
The team at NINKASI Rentals & Finance has just got bigger with the addition of James Lewis, previously at ECasks. James joins the team in the role of Managing Director as the company continues to grow its unique FV Rental product.
James says “I am thrilled to be joining NINKASI during this period of exciting growth and become part of its continued success. I am most looking forward to working alongside such a driven and dedicated team to continue to provide excellent service to the brewing community, as well as developing new product offerings.”
NINKASI Rentals & Finance is continuing to grow with more tanks being rented out than ever before. Peter Godwin advises “our FV hire concept is proving so popular that we have struggled to get time to develop all the other ideas we have. James joining us is a positive start to what we expect to be an exciting next 12 months”.
How to Spend Crowdfunding Capital
This is a personal view from a bloke who has reached the magic six zero, worked in Corporate Banking, then started a few businesses and had a bit of success. It doesn’t make me an expert but it gives me “opinions”.
Crowdfunding has been a phenomenal success in raising capital for young and growing breweries, even start up ones. Loads of money raised for not much equity given away, and massive business valuations as a result. And who’s to say those are wrong with a number of brewery sales having been completed in recent years at telephone number figures.
But, how to spend all that crowdfunding cash raised? Yes, of course, a bigger brewery is required and that is accompanied by a move in premises. But, in reality, with sensible business planning and use of traditional finance products, a certain amount of that is already possible. Using equity instead of debt just reduces the interest cost and therefore the overhead. That makes the brewery more profitable but doesn’t, in itself, add to the enterprise value.
No, in my opinion, the best use of capital raised is to fuel growth. For that a business requires a clear market strategy, a coherent product range, branding that appeals to the target market, and a committed team of people with the skills and determination to deliver. You may notice that none of these are things you can go to a funder and get a loan against – they all need to be paid for out of the business resources.
So my view is that breweries need to leverage their fixed assets with borrowing to preserve cash in the business for investment in growth. Rent the property, hire, lease or rent all the plant, machinery and vehicles. Owning the assets does not make a business valuable. In fact, when a brewery is sold it makes just about no difference. Think about it, if a brewery being sold owns it’s building then the building is valued at its current market value. But it’s sales volumes and brands are valued at many multiples of book value so which would you rather be selling?
Look at the recent sale of Fullers for £250m, would it have been £250.5m if they had owned their trucks instead of leased them? But it could have been £200m if their sales level had been £5m lower.
My advice to breweries with Crowdfunding Capital burning a hole in the pocket, don’t repay debt, don’t buy/own assets, invest in people, the brands and the markets and build presence and volume – that’s what will give your investors the biggest return.
When I see that in a Crowdfunding Prospectus it will get my cash.
As I said, just an opinion…….
A Family Affair
The team at NINKASI Brewkit Rentals has just got bigger with the addition of Theo Godwin, previously at Close Brothers Brewery Rentals. Theo joins his father Peter, also Andy and Kay Thompson (all ex CBR/ECasks founders) as the company continues to grow its unique FV Rental product.
Theo says “I am really excited to be joining this business at such an early stage, and am looking forward to helping NINKASI Brewkit Rentals to expand its product range and provide an ever better service to the brewing community”. Theo will primarily be looking after customer orders, sales and marketing as well as helping to develop the back-office systems needed to support growth.
NINKASI Brewkit Rentals is also making further investments in new warehousing, office accommodation and staffing ready to support a number of new product initiatives in the next few months. Peter Godwin advises “our FV hire concept is proving so popular that we have struggled to get time to develop all the other ideas we have. Theo joining us is the first step of many in what we expect to be an exciting next 12m”.
Second Article
We’ve been featured in this month’s Brewing & Beverage Industries Business magazine, check out the small article and advert below.
Open for Business
We have now officially launched! Check out our announcement article and advert in the June 2017 issue of Brewing & Beverage Industries Business magazine.
