14 Feb 2022
Capital equipment, by its very nature, is expensive and few have the spare cash to pay for it upfront. Even if cash were on hand, it may not make sense to use it to pay for large pieces of equipment when working capital is central to survival…
Adam Bernstein
Job Title
Image © jirsak / Adobe Stock
In practice, vets need to finance acquisitions and for most there are two options – bank finance and asset-based finance.
Adam Bernstein spoke to two key players – Shire Insurance Services and Braemar Finance – to see how they would approach the matter.
Keith Dickinson, managing director, explains that the company was originally known as Veterinary Insurance Agency. He says that “we are independent and authorised by the Financial Conduct Authority and work with more than 50 different insurers, banks and asset financers”.
And because it’s independent, Shire can make recommendations from a panel of funders as to which lender to use for a variety of different purposes; equipment finance (asset backed), working capital, share purchase, refurbishment, tax loans and commercial loans all fall into the remit of its team.
While many think of asset-based finance (more on this later) as the main means to acquisition, Keith says that on occasions practices looking at funding equipment should consider using a traditional bank as an alternative. In fact, he added: “New starts and newly established practices are well advised to consider using a ‘consolidated loan’ which may give them financial leverage at a time when they need it most.”
In more detail, a consolidated loan might amount to £50,000, comprising £20,000 for a piece of equipment, £20,000 on a practice ambulance and £10,000 to refurbish the waiting room. The money is sourced and drawn down as needed, and this has two important advantages. Firstly, you have cash to negotiate with and obtain any discounts. And secondly, and perhaps most importantly, the loan does not have to be short term or fixed to a three or five-year repayment term. It can be as long as 13 years, which will have a huge benefit to cash flow, but still enable you to pay off chunks without penalty.
Contrary to popular belief, Keith says that traditional banks are happy to lend “and are looking to support growing veterinary practices by offering other services”.
He added: “The loss of their existing business to corporate groups in the past 10 years has sharpened their appetite and, as a result, they have become very competitive. Banks tell us they rate the veterinary industry as a safe lending environment.”
Naturally, the proposed interest rate on any loan is important, but Keith thinks a wider view of the clients’ interests is no less so. For long-term fund-raising, Shire looks at “existing loans, securities, second charges and debentures, as well as assessing what future financial requirements are likely to be needed”.
He says solutions can often be found that are “more flexible”.
Further, there’s no limit to the amount that can be borrowed; banks just look at the ability to repay. They require an Assets Liabilities Income Expenditure (ALIE) statement to assess the viability of credit, but the money can be used for any bona fide business purpose.
New starts, says Keith, do face a ceiling on borrowing. Here he considers £250,000 a reasonable yardstick. He said: “Every case is different, but there is always usually a solution as the banking sector is constantly reinventing itself.”
As to the process, Keith says that “sometimes the amount of information required by the lender may seem daunting, but we aim to make it as painless as possible”. The amount of detail required will reflect the amount of the loan required and the degree of difficulty in getting it; it’s normal for projected forecasts to be revisited.
A funding application can take anything between two months and a year to complete. Bank fees are normally 1.5% of the loan (which can be added to the loan). Solicitor’s fees vary depending on each case and Shire’s fees are paid by the lending bank. Interestingly, Keith added: “For the purchase of a single piece of veterinary equipment, most of this process is unnecessary and for this the rate itself is more significant. However, the vet still needs to understand the difference between lease purchase and lease hire and how each are treated differently.”
The main distinction between lease hire versus lease purchase agreements is that at the end of the latter, the customer is the legal owner of the asset. But at the end of a lease hire agreement, ownership of the asset remains with the lessor – the lender.
He ends by conceding that asset-based finance is much quicker to arrange and can be done in weeks, but notes, as before, that bank lending can look at the bigger picture, with more flexibility and over a longer term.
For Aileen Boyle, managing director, asset-based finance is a good alternative to bank lending precisely because it “allows a client to acquire business critical assets where the funding terms match the useful economic life of the equipment or asset”. This, she adds, could typically be up to seven years.
This form of funding is a good alternative to bank lending, as it is typically used for more day-to-day cashflow requirements.
In the world that Braemar operates in, several different forms of finance can be offered. But in terms of veterinary practices, this often means hire purchase (HP), leasing and loans. Aileen said: “HP tends to be popular among vets as it allows outright ownership of the asset at the end of the agreement term.” But, she adds that there’s another benefit that follows from this form of funding.
She said: “The asset may potentially be claimed against your taxable profit, under your Annual Investment Allowance, which is an advantageous tax benefit.”
The company also offers loans, which Aileen says “can also be a good source of funding to complement asset acquisition, for example, for soft and ancillary costs like practice refurbishments”, which often coincide with capital expenditure.
As to what asset-based finance, HP and leasing are usually used for, and whether there is a typical minimum, maximum, or average amount for each, Aileen simply said: “Most assets needed to run a veterinary practice can be financed using HP, leasing and loans, and facilities can range from £1,000 upwards with no upper limit.”
Naturally, steps need to be followed when seeking finance. On this, Aileen advises practices to “simply contact us to tell us how much you wish to finance, the purpose and the term you prefer. Our finance agreement will be tailored to suit you with fixed payments over an agreed term”.
She continued: “In-house specialist underwriters provide quick decisions with the funds paid directly to the supplier’s bank account once the equipment has been delivered and/or installed to your satisfaction.”
In a process somewhat similar to bank borrowing, Braemar – like all asset-based lenders – will need sufficient information on the background on the applicant(s) and the practice.
Aileen said: “We’ll typically ask for information on your business, including latest accounts or financial statements.”
She emphasises that for an established business, the process is simpler, and that financial statements are normally all that are required to secure capital investment funding. She said: “We typically only ask for business plans from new starts because they give good insight into the business’ strategic objectives and how the proposed capital investments are going to benefit the business.”
Braemer prefers to meet clients in person to establish a relationship and to gain a detailed understanding of their business and their objectives. The goal here is to understand what the applicant is looking to achieve, after which a recommendation on the best finance solution for their needs – whether that be hire purchase, lease, or loan – will follow.
As Keith noted earlier, asset-based finance can be quicker; Aileen makes clear just how quick when she says that “applications can be approved in a matter of hours, and we have no upfront charges when applying”.
She added: “It is only at the point of providing the funding that there may be a documentation fee, which is typically around £125; this fee will be detailed in your finance agreement.”
Of course, processes have boxes to be ticked, and so, offering a piece of advice, Aileen said: “Have your latest financial information to hand as this will speed the already short process up. Something to note is we aren’t afraid of tailor-made deals – it’s what sets us apart. If the client’s request is unusual, we talk it through with them before we put an application together to determine if they want to proceed, or maybe work it in a different way.”
