The market for new woodworking machinery has traditionally been overwhelmingly purchase oriented in the UK.

Furniture manufacturers, joinery com-panies and merchants have preferred to buy outright and see capital equipment appear on a balance sheet, shoring up asset value, rather than allow it to go off balance sheet via rental or lease deals. But, the quickening pace of change in manufacturing is making lease an increasingly attractive proposition.

Key to this is that companies are coming to view leasing as a means by which they can safeguard themselves against production inefficiency. Technological advances are not so easy to benefit from when your machinery has been purchased outright and you are stuck with it until you have the finance to contemplate buying a replacement.

Phil Cox of Corporate Leasing and Finance, who specialises in the provision of leasing packages for woodworking machinery buyers, said: ‘Outright purchase makes a big hole in the budget, so there is less money at a later stage to acquire new machinery and the productivity improvements it would bring.’

Assistant managing director at Trymwood Machinery, Selwyn Doling, agrees: ‘Lease puts the company in a better position to trade up which is very important for productivity. If you spend less time making something, you have got more chance of making more money in the process.’

Although the technology arguments for lease over purchase are persuasive, the financial advantages are swinging the balance for many.

Limited finance

A recurrent problem for UK wood product manufacturers is that limited finance prevents them from investing in the dynamic, cost-efficient production platforms they need to combat intense competition and the high value of the pound against the euro.

The advantage of renting or leasing, as has been mentioned, is that unlike outright or hire purchase, it can be undertaken outside the capital budget and appears off balance sheet. Instead of a large upfront cost there is a regular monthly premium that will not skew the company’s financial ratios the same way a large capital expense will.

Also, under lease, the VAT costs are spread over the period of the lease term rather than in one lump sum at the outset.

Residual risk is minimised, given that it is borne by the lease company rather than the manufacturer. This becomes important if second-hand values fall, catching out manufacturers who have not factored in sufficient residual costs.

And most lease deals come with maintenance packages, so breakdowns are likely to be less expensive than if the machinery were fully owned.

Sandra Graely, company secretary at Homag UK, said: ‘A lot more of our customers are opting for lease than used to be the case because of the strong financial advantages. And they have a lot of lease options to chose from, from the likes of Lombard, Capital Bank, Barclays Bank and Yorkshire Bank.’

Cost penalties

In addition to the more obvious financial advantages, there is also less of a cost penalty if machines become redundant under lease.

Manufacturers owning their machinery can find themselves left with expensive lumps of metal that cannot be straightforwardly redeployed if business slumps. With lease, the manufacturer can hand back the machine to the leasing company at the end of the three, five or seven-year term if it does not need it anymore.

Alternatively, if it wants to keep the machine, it can extend the lease period based on the residual value of the machine.

Rye Technology Ltd managing director Adam Kingdon said: ‘The key is that lease is becoming more flexible, which is good because our customers are in a cyclical business. Under some lease arrangements it is possible to pay the charges for six months, when the company is busy, and not pay them at other times when the machinery is not used.

‘Deferred start-ups are available where, for example, there are no charges during the first year.’

However, the most significant advantage cited for leasing is that it promotes a change of attitude towards capital investment from ‘making do’ with whatever the arbitrary capital budget allows, to one where the necessary capital equipment is more readily put in place.

Nick Pickles, finance director of machinery distributor NCMT, said: ‘It gets the company to concentrate on putting in place the machines needed to maximise product-ivity. Companies should look at machinery in the same way that they look at computers, cars or coffee machines, which they are used to looking at it in terms of the cost per month, per mile or per cup of coffee.

‘They tend not to have that when it comes to machine tool purchasing but leasing tends to force them to think that way.’