Office Fit Out Funding
An office is so much more than the place where your staff work (some or all of the time). It’s the home of your business, so it needs to support your business and people. A well-designed office can create significant improvements in your staff collaboration, productivity, wellbeing, and engagement. As a result, the success of your business increases.
However, these benefits do come at a cost. An office fit out is a significant investment, often costing hundreds of thousands or millions of pounds. While your office fit out will provide your business with benefits for years to come, it has to be paid for a lot sooner than that.
This is why many companies face a dilemma when deciding how to fund their office fit out. While initially, self-funding looks like the most obvious option, it can use a lot of cash needed for daily business operations. Few of these companies know what other options are out there, and how to decide which is best for them.
As an office fit out company, our clients sometimes ask us “What is the best way to finance my office fit out?”. While our answers will vary depending on their unique situation, the main options are purchase, loan, lease finance, or rental. When making this decision for yourself, there are a few key things to consider, such as available funds, company growth, and interest rates. In this article, we’ll explain each of the 4 options in turn, and then give you a few tips on how to make the right decision for your company.
Self-funded is the most common and straightforward way to finance an office fit out. This means using company cash reserves to pay for the project in its entirety. Because no third-party funding is involved, all the assets belong to you from the outset. There are also ongoing payments to budget for. In addition, purchasing upfront allows you to claim tax relief under the AIA scheme up to the value of £1,000,000. To learn more about tax relief and office fit out, read this article.
While this may seem like the obvious choice, there are several drawbacks to self-funding your project. An office fitout is a big investment. It could tie up cash that is needed for daily business operations. This is especially problematic if your company is growing rapidly, or you don’t have large cash reserves. Working with internal capital can also restrict your budget below what you need. As a result, you would have to restrict the scope or the specification of your project, reducing the overall ROI.
A bank loan is a popular option for companies that need an extensive office fit out but don’t have the funds to purchase outright. Funding your fit out by a bank loan involves borrowing money from a bank and then paying back the principal over time, with interest. This means you reduce the upfront cost of your office fit out, freeing up cash for other areas of the business. Loan terms are typically anywhere between 1 and 10 years, allowing you to make consistent repayments that are easy to budget for.
However, a bank loan does have several disadvantages. The repayment terms on loans tend to be inflexible, so you could not speed up or slow down payments if you needed to in the future. The bank would also normally require collateral such as property or equipment to protect the value of the loan. There is also the risk of fluctuating interest rates making the loan more expensive.
Lease financing allows you to rent the equipment and assets required for your office fit out, such as furniture, fixtures, and fittings. Once the design is finalised, your lease provider “purchases” the fit out, and you have use of the asset during the lease period. Some lease finance providers will allow you to finance the entire project, including intangible assets such as design. There is usually no upfront cost or collateral required, merely the monthly payments. These payments are also tax allowable and can be offset against company profits.
On the negative side though, lease finance may mean you don’t own the assets at the end of the contract, and they will belong to your finance provider. If you want to keep those assets, you may have to pay a significant amount to the provider. This negates the benefit of lease financing in the first place. Financing non-resaleable or intangible assets such as design is also more complicated.
Fast growing in popularity, furniture rental is becoming a cost-effective and low-risk way to improve your furniture package and spread the upfront cost. Rental differs from leasing because following an initial fixed term (usually 3-12 months), the rent moves to a rolling contract. This means it can easily be returned to the provider. This not only improves your cash flow but enables you to trial different types of furniture in your office, without the risk of being stuck with expensive furniture on a long-term lease.
Renting office furniture is not without its drawbacks. There will typically be fewer choices of products and finishes available than for purchase. They will also be the more standard and popular lines. For products on a short-term rental, the monthly costs will be higher than on a longer-term rental. If you were to keep furniture on rental, over time it would become more expensive than purchase. However, this has to be considered in the light of cashflow. To learn more about flexible furniture rental, discover FluidSpace Flex.
Which is Best for Me?
At this point, you may be thinking “All of that is useful, but which is best for me?”. Unfortunately, we can’t answer that question, because it mainly depends on your company’s financial situation and workspace strategy. However, there are several crucial things to consider when choosing your office fit out financing model.
The first consideration is the overall cost. While the various different types of external finance have many benefits, they almost always increase the cost of your office fit out in the long term. That is not to say you should always use internal finance, but you should consider if the benefits outweigh the reduction in cost.
Cash flow is just as important as upfront cost, if not more so. If you are growing fast, you may not have sufficient internal funds to afford the office fit out you need, so you need an external source of finance. While it may appear more expensive on paper, it may be better for your company in the long run if it enables you to grow faster.
The importance of flexibility is often overlooked by companies, especially when they are trying to minimise costs. While long-term lease finance may be the cheapest option, it may be very expensive if you have to move office before the end of the term and pay out the contract. Equally, self-funding may be very expensive if you invest heavily in an office space you have to move out of in just a few years.
While not as immediately obvious, tax liability can have a big impact on your overall office fit out costs. Many types of loans can be offset against company profits, reducing your tax. However, there are various tax relief schemes available to encourage investment, such as the annual investment allowance (AIA). Tax can make up to a 20% difference in what you pay for your project, so it’s worth examining in detail.
The final crucial aspect to consider when choosing your fit out finance model is its impact on the quality of your office. While it’s easy to forget when you're trying to minimise the cost, the purpose of an office fit out is to make your company and people perform better. If you reduce the brief to enable internal financing, you could limit the productivity of your people, losing out in the long run. Your ultimate goal should be return on investment, not reduction on investment.
Financing Your Office Fit Out
No two companies are the same. As a result, the fit out and financing requirements are always different, so there is no simple answer to the question “Which is the best type of office fit out?”. Rather, you should ask yourself, “Which is the best way to finance my office fit out”. By making sure you remain focussed on what is right for your company and people in the long run, you will avoid making a poor short-term decision.
Here we’ve gone over the 4 most common types of office fit out finance: purchase, loan, lease, and rental. We’ve also covered the advantages and disadvantages of each, as well as some key factors to help you make the best decision for you. It’s important to remember this article is general and doesn’t account for your specific circumstances. Always consult with a qualified professional before making any decision about how to fund your fit out project.
If you’d like to learn more about office fit out costs, download our office fit out costs guide. We’ve analysed a wide range of office fit outs to give you a guide as to what you may need in your workspace, and what you can expect to spend to get it. The guide includes office fit out costs per sq/ft, what affects office fit out costs, how to choose your specification, why some fit out companies are more expensive than others, and how to define your fit out needs. Download your office fit out costs guide here.