Alternative funding

Published:  03 July, 2007

In recent times, many companies prefer to concentrate their resources on their key area of activity and leave other aspects, such as plant management, to the manufacturer of the equipment. This philosophy also includes considering alternative ways of funding plant, especially ways that avoid the initial high capital outlay and those that include maintenance costs.

There is currently increasing interest in paying for air compressors through asset finance, with or without a built in maintenance plan, because the cash flow benefits and flexibility of a finance package can be very convenient and cost effective for companies wishing to invest in or upgrade compressed air equipment.

One compressor manufacturer that operates a finance scheme offering high quality compressor ownership without the initial capital outlay is Atlas Copco Compressors. The scheme delivers a variety of flexible payment choices backed up by high levels of financial expertise and nationwide coverage and has generated considerable interest in the market place.

Having decided to use a manufacturer-linked source of finance instead of tying up cash in compressed air equipment, there are three types of funding method on offer, typically taken out over a five or ten year period: Hire Purchase, Finance Lease and Contract Rental. In the case of Atlas Copco because of its dedicated service network, these can all include the costs of installation and maintenance as well as the compressor itself. The flexible payment options can also allow an upgrade to a better, more cost efficient compressor. Which deal to opt for depends largely on the following questions:

  • Is the ultimate ownership of the compressor(s) important?
  • Are there sufficient taxable profits to claim all the available capital allowances?
  • Is it important that the asset appears on or off the balance sheet?

If the answers to questions one and two are yes, a Hire Purchase agreement will allow a company to claim the allowances in the same fashion as if it had paid cash. It also allows the spreading of capital costs over a certain period of time. If no, then Finance Leasing may be a better option because the leasing company will claim the tax allowances and reflect this back in the form of lower monthly payments.

Depending on the nature and size of a business, ultimate ownership of the compressors and their position as an asset on the balance sheet will have varying importance to an organisation. It is also often important to know how much each piece of plant contributes to the cost of production. Other factors to consider when deciding to use a manufacturer-linked source of finance are whether interest rates are likely to rise or fall and whether want a fixed rate or a variable rate product is required. Both these solutions are available through Atlas Copco.

The distinguishing feature of Contract Rental, the third option, is that it is off balance sheet so other lines of credit are not affected. It is an option that meets the specific needs of the operator who needs to circumvent either the operating company's gearing restrictions or the capital approval process. Ideally, the contract should include maintenance and parts within the monthly payment.

An additional consideration is that at the end of the lease period ownership of the equipment reverts to the lesser, so there are no disposal problems to take into account. A further plus is that operating lease rental payments carry VAT and are wholly deductible against profits.                                              

In calculating the most competitive terms for lease rental, Atlas Copco takes into account the residual value of the equipment and accurately assesses the usage pattern that will ultimately affect its terminal value.

Maintenance can also be included in any of these funding methods, for example whereby Atlas Copco is responsible for all maintenance and for service planning. This allows a company to effectively offload all the risk in terms of operating costs. It also makes the budgeting process easier as compressed air costs can be calculated and no unexpected service or repair bills have to be met.

In our current economic climate, where many companies have less capital to spend, funding compressors through finance deals is looking increasingly attractive. It is an easy way of acquiring new equipment, can remove the worry of maintenance and repairs, and leave the company to invest cash more profitably in other parts of the business.

 


 

Not all compressed air users are able to undertake the major capital investment required to take advantage of the latest technological innovations to match their current and future needs.  That is why Atlas Copco has designed a Service Investment Plan (SIP) that links into its ServicePlan contracts, provides a free site audit, delivers new energy efficient compressors on a lease contract, and requires no capital Investment.

The combination of an extensive free site audit delivering energy efficient solutions, and often reduced servicing costs, means that in many cases there may be a reduction to the current ServicePlan contract charge, while any increases will generally be modest. What"s more, Atlas Copco says it guarantees every potential saving that is identified by its site audit, provided the recommendations are implemented.

Under the SIP programme, brand new compressors are supplied and installed - generally on a 5-year lease contract basis. At the end of the lease contract period, the equipment can either be purchased for a fraction of its initial cost, the ServicePlan contract can be extended at a reduced cost or the equipment can be removed and replaced with new compressors, forming the basis of a new ServicePlan.

Here are three practical example of how companies have benefited from the ServicePlan SIP programme:

 

Company A

A customer, with an existing service contract on fifteen fixed speed compressors, in excess of 20-years old, asked for an audit of his site. As a result, Atlas Copco recommended replacing his existing equipment with two new, large compressors and a dryer on a 5-year fixed contract. This saved £17,000 per annum on service costs and a further £56,000 per annum in energy.

 

Company B

This customer had an existing service contract on three 15-year old, fixed speed

compressors. An audit recommended replacing the equipment with new Variable Speed Drive technology on a three-year fixed contract. Although this increased the customer’s annual service costs by £12,000, it provided a £32,000 per annum benefit in energy savings - a significant net benefit.

 

Company C

Atlas Copco’s customer had an existing service contract on six 5-year old compressors that were used 24/7. On the company’s recommendation he took out a new 5-year contract, replacing the existing compressors with five new, fixed-speed machines and a VSD unit, leaving one old compressor as back up - and keeping annual costs to the customer on a par with the previous contract.

 


 

For further information please visit: www.atlascopco.co.uk/ukus

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