For most businesses, even those turning over millions of pounds per year, purchasing new machinery is a large financial decision that should not be made lightly. Some machinery costs hundreds of thousands of pounds, so that purchase can dramatically alter the financial situation of your business. It is also important to consider a number of other factors, such as how much the new machine will be used, and what extra output and capacity it will create, as we’ll explain in more detail below. In this guide we look at some of the key factors that should be considered before purchasing new machinery.
If a company is very cash-rich, they may choose to buy machinery or equipment outright so that they have full ownership from the outset and can keep the equipment for as long as they choose. However, due to cash flow constraints, buying equipment outright is not a viable option for most companies. Even if a company has the liquidity available, buying machinery outright may impact their cash flow so significantly that they have to curtail investments in other areas of the business, which can slow growth, or businesses just decide to leave a healthier bank balance and spread the cost of the purchase. Today there are many finance options available for a company that wants to invest in new machinery, including bank loans and asset finance. For more information on asset finance, you can visit our Asset Finance page.
You are able to claim capital allowances when you buy what HMRC define as ‘plant and machinery’, which covers quite a broad number of items, and costs surrounding those items. Capital allowances refer to a sum of money that can be deducted from the amount of tax a business needs to pay. These allowances are also available when you purchase vehicles, machinery or equipment through asset finance. These allowances are often changed in each financial tax year, so it is always important to monitor timing of any significant purchase in order to get the best allowance for your business. If you purchase an asset through hire purchase, you can claim back the VAT, and there are further capital allowances available. If you purchase an asset through leasing finance, you can reclaim the monthly VAT payments on your vat return, and offset the rental charge against your taxable profits. It is worth discussing the timing of the purchase with your accountant and chosen finance house.
Growth Plans & Usage
Another important area to consider is how the new machinery will fit in with your business’s growth plans – do you already have enough work to ensure the new machinery will be used on a regular basis, or have you made a plan to bring in enough work over the coming months and years to ensure the machinery/equipment is utilised enough to justify the purchase? Sometimes there will be external economic factors that might impact the demand for your services, but outside of that it’s very important that you ensure the machinery is being used enough. On the flip side, if you have more work than you can handle for the foreseeable future, it’s important to estimate the output of new machinery so that you know how much machinery you require.
Just like buying a car, the running costs of plant equipment can significantly impact the overall cost of the equipment over its lifetime. Before making a purchase, it is very important to compare the running costs to a) the machinery you have already, if applicable and b) similar machinery that is available in the market. Aspects to consider include fuel costs, maintenance and repair costs, and any increased output from the new machinery.
Another factor to consider is how long you plan on keeping the machinery or equipment for. Many companies do not keep machinery for more than three or four years before they replace it, and have no interest in owning the machinery. In that situation, leasing finance may be the best option. Hire purchase finance gives you the option to buy the machinery outright, once all payments have been made over an agreed term. Again you can speak to your asset finance house about your specific situation and requirements to determine which option is best for you and your business.