How to finance your office project in 2020

Raising funds for a relocation or refurbishment project is no simple task. In fact, it can feel like a full-time job. Fortunately, whether you’re looking to develop, redesign or purchase commercial property, you have an excess of options available.

Objectives & ROI

Firstly, however, you’ll need a strong argument for why you’re undertaking a fit-out in the first place. Is your workplace preventing your company from remaining competitive? Is the office affecting your brand, staff recruitment and retention?

By understanding your essential objectives, you ensure your investment is successful and, should you require funding, your aspirations send a strong message to potential finance companies of your requirements.

Leasing your fit-out

Leasing is a popular option for other high-expense business investments (think company cars, software or cloud services) but did you know you can utilise this service for your office fit-out too – from design and construction through to your furniture and IT specifications?

Types of lease

Leasing itself comes in many forms, so it is worth bearing in mind that there is even a degree of flexibility in the kind of lease that might be best for you. Typical terms are 2-5 years with 5 years being the most popular.

Finance lease

Finance Leasing is the most popular form of leasing as it is extremely tax-efficient, the lease is 100% tax-deductible, and can cover all of your expenditure, not just the assets. You get to spread the costs over the term of the agreement, including the VAT, and you have a great deal of flexibility at the end including the option to keep the assets indefinitely for a final one-off payment.

Lease purchase

Also known as “hire purchase”, you make payments over a fixed period, at the end of which the asset becomes yours subject to paying a final Option to Purchase (OTP) fee. Treatment is very similar to using capital (similar from a tax perspective) including the need to pay the VAT in full upfront.

Operating/RV Lease

The bank takes “risk and reward” by setting a residual value (RV) in the assets. Popular in the past as the only form of leasing off-balance sheet, changes to accounting regulations have changed that but, for some, the lower repayments of an RV lease can be an important cash flow consideration.

Benefits

• Repayable are made in instalments, reducing expensive upfront costs or large VAT payments (ex. lease purchase)
• Repayments are tax-deductible
• Monthly repayments are planned and can be easily budgeted
• As long as payments remain on-time, financing does not affect your borrowing capacity
• If your business is VAT registered, this can be claimed back on your monthly repayments

Drawbacks

• Monthly payments must be maintained for the duration of the lease
• You may need to pay a deposit or advanced payment
• The lease may work out more expensive than if you buy the assets outright
• Your company could be locked into inflexible medium or long-term agreements, which may be difficult to terminate

Bank Loans

Bank loans are one of the most common sources for construction financing, though they are often used for smaller projects, usually up to £3 million. In these instances, you’ll work directly with your bank lender, who will manage the financing project alongside you.

Benefits

• Monthly payments are pre-calculated, planned and easily budgeted
• Repayments can be paid over extended terms (often up to 10-12 years)
• The loan can be integrated with products/equipment lifecycles and potential obsolescences
• No requirement to give the lender a percentage of your profits

Drawbacks

• You will need to maintain your monthly payments for the duration of the loan
• Your bank may have upfront fees
• Doesn’t attract the tax advantages of a finance lease
• Creates potential over-reliance on your primary funder and reduction
  in credit ‘headroom’
• Repayments can be subject to the fluctuating interest rate

Company investment

You may decide that you have the cash flow to cover the entirety of the design and construction work upfront. It is worth discussing your cash flow with your fit-out partner as flexibility can often be built into the project to ensure you do not feel any significant financial strain.

Benefits

• All assets belong to the company from the outset
• Annual investment allowance (AIA) can be claimed (typically £100,000) for qualifying expenditure
• No ongoing payments

Drawbacks

• Cash flow is bound to the assets, so can’t be used in other areas
• Can limit your budget and project scope
• Is not fully tax-deductible
• Owned furniture and equipment can quickly become outdated

Hybrid

In amongst leasing and paying upfront is using a combination of these methods to ensure you receive the best value for money. You’ll want to consider the product and service in which you’re investing.

A good example of hybrid involves using capital for some or all of your Annual Investment Allowance (AIA) where you can benefit from 100% tax allowances and then leasing, especially finance leasing, for everything else to maximise your tax position.

What Can I Finance?

In most cases,  your entire fit-out or refurbishment can be financed, these items include:

• Workplace consultancy
• Office interior design & space planning
• Installation & delivery
• Furniture
• Partitioning
• Lighting
• Flooring
• Tea points & kitchens
• Reception areas
• Heating, ventilation and air conditioning (HVAC)
• Suspended ceilings
• Mezzanine floors

Creating your financing application

• Building rental or purchase price
• Total cost of design and construction
• Cost breakdown
• Specified professional teams
• Project timescales
• Planning permissions and restrictions
• Building regulations
• Gross development value (final value of your property following construction)
• Contingency plans

We hope this has provided you with some insight into your potential options. If you would like to learn more about financing, get in touch to find out more!