We were recently asked to look at providing some asset refinance for a potential customer in order to pay off an expensive short term revolving credit facility they had taken out (basically a credit card-like facility).
We reviewed the information, appraised the equipment and were able to make an offer without Personal Guarantees within 48 hours. Unfortunately the customer decided that they would instead put the funding into the company themselves personally to avoid the paperwork and interest charges.
It can often seem that, if you have the funds, the cheapest way to clear existing finance or to acquire new is to put your own money into a company. But that isn’t always the case for a number of reasons.
1. Asset finance agreements have tax advantages
Unlike money you might put into a company yourself asset finance agreements enable the company to claim certain tax breaks. A Hire Purchase agreement enables the company to offset the interest charges against corporation tax as well as claim capital allowances for any equipment financed (including refinance agreements). A Finance Lease agreement enables the company to offset the whole rental, not just the interest, against corporation tax.
2. Limiting Personal liability
Putting your own money into your company entails taking a 100% risk with your own money. If the company fails, or struggles for an unforeseen reason, your personal money is at risk. You can’t prefer yourself to other creditors for repayment if a company is failing as an Insolvency Practitioner will likely investigate this and undo the repayments.
With an asset finance agreement the primary security for the lender is the equipment financed. In a default the asset is repossessed by the lender who owns it, sold to clear the balance and any shortfall is either written off or claimed under other security such as a Personal Guarantee. Selling the asset will almost always reduce any personal liability under a Guarantee.
3. Personal funds aren’t actually free of cost
Whilst most owners who put money into a company don’t charge interest on their loans the money they put in can often have cost them personally; borrowing on credit cards or personal loans to put into a company costs the individual. Even if the money is available the opportunity cost is often forgotten – what else could the money have been used for personally or what interest would it have earned? And, even if an owner does charge interest on the loan to their company they incur a personal tax charge for the interest income they generate.
Additionally, if the money has come from the company it has already attracted income tax, possibly national insurance (employers and employees) and corporation tax – the actual sum of money it has cost has been much higher than the money being put in!
At Genesis we work with business owners to structure finance solutions that work for them and their businesses. We always go the extra mile to find a way to provide funding – if you’d like to find out more you can contact us here.