Fixed assets are those items such as property and plant and machinery which your business acquires with the expectation of retaining and using over a period of years. As such they can be regarded as a business’s investments rather than working capital. Therefore funding for these long-term assets needs to be on a long-term basis. It is important to note that the type of funding follows the use that the business is going to make of the assets, not the type of assets themselves.

For example, a plant and machinery dealer will buy a piece of machinery, but this will be to sell it on in the short-term. It will therefore not become a fixed asset on their balance sheet, but will form part of their working capital as it is their stock. Their funding for this machinery will need to be flexible funding based on short-term requirements where the relevant assets will be changing from day to day.

The security taken will need to be of a floating charge nature that allows the dealer to buy and sell the item without running to get the lender’s permission each time. Contrast this with a manufacturer that buys the machine from the dealer. They may expect to keep it for a lengthy period, say three to five years; they can offer a fixed charge over the specific machine as specific security for a specific loan or other financing arrangement used to purchase it.

Financing Fixed Assets

While you can sometimes raise funding against intangible fixed assets such as goodwill or intellectual property (see mezzanine finance in Chapter 6 for example), or be able to borrow against the value of investments held in other companies, the principal fixed assets which you may need to fund are:

• property; or
• plant and machinery.

 

While talking about financing such assets it is important to remember that this can be a two-way street in that you may look to raise finance in order to buy such assets; but you may also use the value of such assets that you already own to raise finance for other purposes, such as further investment or to fund working capital requirements.

Property Finance

Some businesses, such as a hotel or a shop, may be based around ownership of a particular property which you may therefore need to buy in order to run the business. Other businesses may not be tied to a particular property, but may still want to acquire or expand the premises in which they operate.

If you want to own rather than rent, but do not have sufficient funds available to buy such a property outright, you will need to borrow money with which to do so, either through your business or through your pension scheme. The normal route to financing will be via a long-term commercial mortgage.

Occasionally your circumstances may mean that you will need to use short-term funding through a bridging loan to finance a purchase.

Pros And Cons Of Buying Commercial Property

Buying a business property is a major step for any business and needs to be carefully considered. Many businesses see that their likely mortgage payments (on which the interest element will be tax deductible) will often be similar to the level of rental payments for a similar property. They therefore think it makes sense to buy a property, so as to ensure control of their site and not be subject to rent increases or landlord’s restrictions, while obtaining the advantage of any increase in the building’s capital value which might include any future planning gain involved in conversion of the site for housing use.

There are, however, many potential disadvantages of buying a property, as the other side of increased stability is a lack of flexibility. While you could possibly sublet any unused space in buying a property, you will have had to tie up a large amount of your capital in a substantial deposit on the building; funds which you might subsequently want to have available for other use in your business. You will also have a large loan which will need to be serviced over a long period. Also, if your business changes, expands, contracts or needs to relocate, it can be far harder to do so as the owner of a property that needs to find a buyer or a tenant for the business, as opposed to exiting a lease at an agreed break point.

Also many commercial properties increase in value at a much slower rate than domestic properties so the prospects of a capital gain may be much less than you expect, while since you are now responsible for the costs of maintenance of the property, any reduction in the property’s value will directly affect your balance sheet. Do not forget as well that if you take out a variable rate mortgage you will be exposed to increases in interest rates, which can change over short periods of time in comparison to rent reviews which will generally only happen on a five-year cycle.