Smarter ways to pay

London - The process industries are under increasing pressure to improve their operations by installing, updating and retrofitting new equipment. This, however, costs money that top management may be reluctant to provide, despite benefits such as increased output and efficiency and lower energy consumption.

There are alternatives to taking lump sums out of company bank accounts, however, when sourcing new machinery, including leasing, hire purchase, finance leasing and operating leasing (see box p21).

One compressor manufacturer that operates a finance scheme offering machine ownership without the initial capital outlay is Atlas Copco Compressors. The scheme delivers a variety of flexible payment choices, backed by financial expertise and nationwide coverage.

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. All three can include the costs of installation and maintenance as well as the compressor itself.

Which deal to opt for depends largely on the following questions, explains Elwyn Smiles, national sales manager, Customer Finance, at Hemel Hempstead-based Atlas Copco UK Holdings:

l Is the ultimate ownership of the compressor(s) important?

l Are there sufficient taxable profits to claim all the available capital allowances?

l 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,” said Smiles. “It also allows the spreading of capital costs over a specific 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.”

Ultimate ownership of the compressors and their position as an asset on the balance sheet will have varying importance depending on the nature and size of a business. 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 a fixed rate or a variable rate would be preferable.

The distinguishing feature of contract rental, the third option, is that it is off balance sheet, so other lines of credit are not affected.

“This is an option,” said Smiles, “that meets the specific needs of an operator that 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.”

At the end of the lease period, ownership of the equipment reverts to the lessor, so there are no disposal problems to take into account.

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

According to Smiles, a further significant advantage is that operating lease rental payments carry VAT and are wholly deductible against profits.

Another compressor manufacturer, CompAir, has introduced a purchase plan to help companies take advantage of the latest and most efficient technology without breaking the bank. The pay-as-you go (PAYG) scheme is now available on selected products from the CompAir and Hydrovane ranges.

Customers pay a weekly or monthly charge for a minimum period of two years. At the end of this period the customer has 100% ownership of the machine. The payment covers full servicing and back-up throughout the contract, and once the compressor becomes the property of the purchaser it will still be backed-up by a CompAir extended manufacturer’s warranty.


Aerzen Machines, meanwhile, rents out blowers and oil-free compressors for pneumatic conveying and water treatment applications. These rental units provide quick replacement air supply when installed units fail unexpectedly or when there is a short-term demand for extra compressed air, without the need for capital outlay.

“Over the past 12 months, the market is showing good growth and Aerzen have opened a UK-based depot for package blower and compressor rental,” said a company spokeswoman. “Additional business was picked-up due to the UK floods in 2007, which afforded an instant need for the product.”

Looking ahead, she said, the market outlook is “very good”, with the company gearing up to increase its range of machines and to provide compressor packages.


Finance options deliver savings

Atlas Copco reports how a customer with an existing service contract on 15 fixed-speed compressors, all in excess of 20 years old, asked for a site audit. As a result, Atlas Copco recommended replacement of the existing equipment with two new large compressors and a dryer on a five-year fixed contract. This provided annual savings of £17,000 on service costs and a further £56,000 on energy.

Another customer had seven compressors, all in excess of 25 years old. Atlas Copco took on a turnkey project to replace these machines with two new units, plus all pipework, installation and civil costs.

As production operated 24/7 and the customer was unable to shutdown existing machines during installation, the project also provided portable compressors to be on site during the installation period so that full production could be maintained.

All costs were incorporated into a seven-year financial deal with a full service and maintenance package. The energy savings and increased efficiency of the new equipment gave a payback on the project of 18 months.


Deal or no deal

There will be a forced change in the attitude of industry towards different forms of financing, predicts Steve Barker, an energy management consultant for Siemens Automation & Drives. “A little lateral thinking,” he said, “could go a long way when looking to reduce operating costs, particularly for energy-saving projects.”

Barker cites a number of possibilities as an alternative to self-financing, when the customer has to increase its Capex budget and take all the risk.

Hire purchase is used, typically, by smaller organisations for transactions valued at £1-2 million. VAT needs to be paid up front, but the customer may be able to claim capital allowances as the equipment owner.

Finance leasing fully amortises the lessor’s investment in the equipment, with the assets being kept on the balance sheet for the customer and the rentals being treated as an operating expense. In contrast, operating leasing takes the asset off the customer’s balance sheet, with rentals becoming an operating expense for the customer.

The customer has no direct contact with the lessor in a managed service agreement. The contract is with the managed service provider and usually covers the provision of a service that includes assets and maintenance.