34. So, you are thinking of upgrading your IT. How will you fund it?

Your operations or IT guy has made the business case, the specification is drawn up and the request for quotation has been issued. You’ve seen a couple of providers, taken up the references, and now you’re ready to buy that exciting new kit which will enable your business growth to continue.

And then the last, but perhaps the most important question for an SME is – how do I fund that investment in software and/or hardware?

5 ways to fund your investment

  1. Well you could use cash, but you may not want to tie up valuable cash when it could be used to fund investments to stimulate business growth or indeed working capital.
  2. You could borrow the money – take out a loan to fund the capital requirement. Sources of loan finance for SME’s vary and price and availability will depend on who you ask. You could go to your bank (and indeed it’s likely to be a good idea to let your bank know about the project in any case). If you have already borrowed from your bank, and there is a loan agreement in place, then the small print may include an obligation to ask them first for a quote on any further borrowing. Alternative sources of loan finance can be regional or national.
  3. Another source of funding could be the system providers themselves. They may well have a ‘tame’ source of finance, having often found the need for a source of funding which knows their products, and their reliability. As they will have financed many such systems, you may find that their terms are more attractive. One of their other advantages is that they can more easily stagger the capital payments to the systems provider – most system installations take place over a period of time and payments are staggered. These ‘tame’ funders usually offer some form of HP finance arrangement.
  4. Leasing is another alternative. Leasing keeps your equipment up to date, you pay nothing upfront and you will have predictable monthly expenses. You will however pay more in the long run compared with buying outright. Again, the systems provider will be the point of contact for this option – whether it’s a finance lease or an operating one.
  5. Which brings us to the most recent development in funding your IT investment – Cloud Computing. With the cloud, rather than invest in software licences, the software is run online by a third party provider, and you access it through the internet. You never own the software – you just rent it. Advantages are many, but definitely financial – there is no substantial upfront cost. You will need to satisfy yourself on all the aspects – security being an obvious one.

An important aspect of making this (or any) business investment is to check its impact on Corporation Tax. Generally, if you pay up front for your investment, then there are capital allowances available to relieve 100% of the cost against your profits in the year you make the investment (this also applies to the HP route). If you lease the equipment, never owning it, then you will only be able to claim the annual expense as a business expense.

Lastly, do make sure that you take advantage of any grants that are available for businesses of your size in your area. Although not available to all, and sometimes with many hoops to jump though, it’s always helpful to defray that investment.

This guest blog has been written by Philip Oatley.

To find out more about about funding IT investments or if you would like to discuss any of the topics covered above further with Tectona Partnership, please contact Mark Nicholls on 07818 407061.

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