Credit Lines for Capital Expenditure (CAPEX)

Finding the business capital for long-term investments often requires using external funding. While many businesses naturally reach to traditional loans to fund significant purchases, preserving their cash flow and spreading the cost of investment, these can be somewhat inflexible, providing a single lump sum injection that either doesn’t account for future needs or is oversized, resulting in unwanted interest.

Credit lines for CAPital EXpenditure (CAPEX) offer a more flexible alternative, reducing interest and improving financial management with a facility that can be used as-and-when needed. Learn more about the power of a CAPEX credit line in this in-depth guide.

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Table of Contents

Funding CAPEX

When considering a CAPEX credit line, it’s important to clearly understand the definition of capital expenditure. This is because the facility is strictly limited to CAPEX purchases, and shouldn’t be used for other business expenses.

CAPEX covers the long-term investments that are part of your business growth. They can be both tangible and intangible:

Tangible CAPEX Examples

Tangible assets that count as capital expenditure are those physical items that are bought to perform your work. Tangible assets are those that depreciate.

• Vehicles
• Computers and office equipment
• Machinery
• Office furniture and refurbishment

It’s worth noting that property is another key capital expenditure, however, it is rarely purchased with a credit line as a commercial mortgage is far more suitable.

Intangible CAPEX Examples

Intangible assets that fall under CAPEX are things that have value for your business but no physical form. They are considered to have their value spread through amortisation rather than lost through depreciation.

• Software licences
• Patents
• Purchased customer databases
• Franchise rights

CAPEX vs. OPEX

All the listed tangible and intangible assets can legitimately be purchased using a CAPEX credit line. However, day-to-day expenses are considered OPerational EXpenses (OPEX) rather than CAPEX - funds from a CAPEX facility cannot be used to pay for them. These include:

• Salaries
• Building rent
• Office consumables
• Vehicle fuel

Understanding the difference between CAPEX and OPEX is essential for both accurate accounting and properly meeting the terms and conditions of any CAPEX credit line. CAPEX assets are long-term - they appear on the balance sheet and are written down over time through depreciation or amortisation. OPEX is short-term and part of profit and loss with an immediate impact.

Maintaining this key differentiation ensures lender confidence that the credit facility is being correctly utilised.

How a CAPEX Credit Line Works

At its most basic, a credit line for CAPEX provides a maximum limit for you to draw on, with interest generated only on the sum used. In this way they can be recognised to be similar to a credit card: a facility limit is agreed, and drawdowns are made as needed. Any remaining balance can then be used at a later date.

Not all credit lines operate in the same way, however, with CAPEX credit lines typically tailored to suit your business requirements. Some of the core differences include:

Secured or Unsecured

Lines of credit are either secured, with assets used as collateral for guarantees, or unsecured, based purely on business credit scores and history.

Secured credit lines are more common, with both existing assets and those to be bought with the credit able to be leveraged as security. Using securities means risk is lowered for the lender, leading to lower interest rates and greater credit sums available.

Note, that 100% loan-to-value credit lines are extremely rare, making CAPEX credit lines based purely on the assets purchased impossible. In most cases, the CAPEX credit is used in conjunction with existing capital for purchasing new assets.

Different assets will be set to different LTVs, with slower depreciating assets (vehicles, for example) securing greater LTVs than faster depreciating assets (computer equipment, for example).

Revolving or Non-revolving

A CAPEX credit line can be set up as a revolving facility that allows for repayment and reuse of the capital, or non-revolving, where the drawdown limit is set and not recycled.

A revolving facility is similar to a standard credit card - money you repay becomes available for future use. These facilities tend to be ongoing, without a defined end date, allowing you to purchase more assets when you need and spread the cost over future years.

A non-revolving, or term credit line does not re-release money into the facility when it is repaid, instead offering a defined term of its existence.

Non-revolving, term facilities are more common than revolving CAPEX credit lines, however, at Clifton Private Finance, we work with lenders who are able to offer either structure. Discuss whether you need a revolving or non-revolving facility with our advisor to ensure you get a credit line that best suits your business needs.

Co-Terminous or Staggered Repayment

A non-revolving facility with a set term can sub-structured as either co-terminous or staggered. A co-terminous (ending at the same time) arrangement will mean that repayments will be set such that the full balance of the facility is due to clear on the set date, irrespective of when the drawdowns occurred. By contrast, a staggered term provides the same set period for each drawing, ending only when the final repayment is made.

Staggered repayment structures are more frequently used for smaller sized facilities, while larger lines of credit will tend to follow a co-terminous structure.

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CAPEX Credit Line Structure Example

Paul from PaulCo is looking to expand his business using a CAPEX credit line. His plan is to immediately use the facility to upgrade his business IT equipment and infrastructure, purchase vehicles for some of his staff, and later undergo an office refurbishment. Separate to the capital expenditure, he is also recruiting more staff who may need equipment once they come on board.

Paul expects to leverage 60% of his IT and refurbishment spend with the CAPEX credit line, and 85% of his vehicle spend. The remaining funds have to come from existing capital.

Paul predicts the following expected draw on the credit line over the first six months:

With a facility designed to last for five years, Paul determines that he should obtain a credit limit of £400,000. This gives him the £198,100 he expects to utilise in the first six months, plus plenty of room to use the facility over the coming years as his business expands.

Option 1 - Secured Revolving Credit Facility (no term length)

Paul looks at the first option, a secured ongoing revolving facility set to 8.5%. This setup would work like a credit card, allowing him to pay off and spend as he goes. It would also stretch to beyond five years. However, if not managed well, he can see the interest would grow quickly, potentially reaching more than £15,000 in the first year alone.

Option 2 - Unsecured Revolving Credit Facility (no term length)

With an unsecured facility, Paul would be able to buy the assets fully, with no need to use existing capital. However, the best offer he can find is at 17.1% with a £200,000 limit. With the possibility that the business will accrue more than £30,000 in interest alone each year, Paul sees this as far too high a cost.

Option 3 - Secured Staggered Non-Revolving Credit Facility (5 years)

The staggered term secured facility Paul is offered has a lower interest rate of 7.1%, with set monthly payments based on the credit used. As it is staggered with five-year terms, it could realistically run for far longer than five years in total, but gives him the same cash flow security during later months as it does at the beginning. It offers Paul a stable repayment structure. His calculations are as follows:

• First three months repayments, based on £162,000 utilised at 7.1% = approx £3,700 per month capital plus interest.
• Repayments after six months, based on £198,100 at 7.1% = approx £4,500 per month capital plus interest.
• Repayments if he maxes out the facility, based on £400,000 at 7.1% = approx £9,100 per month capital plus interest.

Option 4 - Co-Terminous Non-Revolving Credit Facility (5 years)

The set term secured facility Paul looks at has a much lower interest rate of 5.9%. In many ways, it is similar to the staggered facility, but if he were to purchase things closer to the end of the term, the repayment spread would be compressed. For example, a £60,000 use in the final twelve months would result in £5,000 per month in capital repayment over 12 months, where the staggered facility would only grow by £1,000 per month over 60 months. However, the lower interest results could save as much as £3,600 per year if he did use the full facility.

For his particular situation, and with a view to his future cash flow, Paul selects the third option, obtaining a secured, staggered, non-revolving credit facility with a five-year (60 month) term.

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Using CAPEX Credit Lines Properly

CAPEX credit line oversight will be in place to ensure that your line of credit is properly used. Unlike a generic credit card, loan, or overdraft facility, a credit line for capital expenditure is limited in usage.

Lenders may enforce this by paying suppliers directly or requesting invoices as part of ongoing administration. Misusing funds must be avoided to prevent breaking contract terms or fraudulent activities. Examples of incorrect CAPEX credit line use include:

• Paying OPEX costs - These include, salaries, building rent, office utility bills, and other operating expenses.
• Attempting ‘creative’ workarounds - Using your credit line to purchase assets that are immediately returned or sold on to free capital for other areas. For example, purchasing £50,000 of computer equipment for a third party who pays the bill to you in cash.
• Generating false paperwork - Misrepresentation of your true accounting to the lender is fraud and faces heavy penalties.

There are situations where emergency asset sales can be undertaken without breaking the terms of your credit line. For example, should you buy CAPEX assets with the credit line that have to be sold a short time later to keep the business running due to an unforeseen event, this can be taken into consideration by the lender without penalty. However, alternative finance solutions may be more beneficial. Clifton Private Finance are here to help and can advise you on your options should your cash flow struggle in the future - give us a call and speak to a specialist before rushing to sell recently acquired assets.

How Facility Size Affects CAPEX Credit Lines

Smaller businesses shouldn’t avoid CAPEX credit lines from administrative concerns. Clifton Private Finance works with lenders who understand the different needs of businesses of all sizes, and credit line facilities can be tailored to match your business requirements. Smaller facilities tend to have a lighter administrative burden including:

• Funds passed directly to your business current account.
• Less (often zero) need for invoice scrutiny.
• More flexibility in OPEX and CAPEX accounting definitions.

Larger facilities may demand:

• Independent valuation of secured assets.
• Funds often paid directly to suppliers once invoices have been provided.
• Planned staged drawdowns.
• Greater scrutiny on accounting and detailed separation of capital and operating expenditure.

Businesses looking for larger CAPEX credit line facilities should prepare for a greater level of involvement from the lender, in line with the larger risk.

Repaying Credit Lines for CAPEX

Repayments for your CAPEX credit line will differ based on its structure. Revolving facilities can feel credit card-like in their repayment schedule, with a set limit, fluctuating balance, and minimum monthly repayment calculated based on current balance. Non-revolving, or term facilities, will feel more like a traditional loan structure, with a set monthly repayment based on capital repayment plus interest.

CAPEX facilities may also be tailored with flexible repayment adjustments including:

• Initial interest-only period - It is common for the first three to sixmonths to be set as interest only, with capital-repayments occurring once this initial term has passed. This is to help businesses ease into their facility, providing essential flexibility when initial asset investment is made.
• Amortising repayment schedules - Each time a drawdown occurs, the remaining repayments are recalculated to meet a regular schedule until the end of the term.
• Capital repayment holidays - If cash flow tightens, breaks can often be requested where the capital repayment is suspended. Interest must still be paid during this time, but the monthly repayment will be significantly reduced. Repayments will be recalculated to meet the end of term conditions once the repayment holiday is complete.
• Staggered term - Each drawdown triggers its own term, leading to smaller repayments structured over a longer overall term.

An Example Repayment Schedule - Co-terminous, non-revolving, CAPEX credit line facility

The following table illustrates a representation of a full CAPEX repayment schedule with multiple drawdowns over five years. The facility is:

1. Co-terminous
2. Non-revolving (fixed term)
3. 6.2% APR interest rate
4. £500,000 maximum limit
5. 5 year (60 month) term
6. Interest-only for first three months

 Drawdowns made on:

Example CAPEX Credit Line Repayment

Risks of Credit Lines

As with all borrowing, CAPEX credit lines are not without risk. It is important to consider the full impact of a multi-year credit line on your business cash flow. Our specialist business finance team at Clifton Private Finance are here to help you evaluate the options and make an informed decision.

Some considerations include:

• Overspending - It is easy to keep drawing on a credit line without proper consideration of the repayment plan and how it affects your cash flow. Unlike a loan, where consultation and evaluation is more in-depth, the flexibility of a CAPEX credit line means accessing the additional capital once it is in place is simple. While this is often a benefit, it can lead to poor decision making. Take care to fully consider the impact each time the credit line is used.
• Capital investment - Secured CAPEX credit lines cannot be used to solely provide the money required for purchases. Existing capital must also be used to balance loan-to-value.
• Cost of interest - As with all borrowing, the impact of interest should be evaluated to ensure an efficient long-term benefit.
• Risk of review - Lenders reserve the right to reassess credit lines, meaning the facility may be reviewed or withdrawn in the future if circumstances change.

Alternatives to CAPEX Credit Lines

Credit lines for capital expenditure represent only one of multiple funding products available to help business growth. At Clifton Private Finance, our advisors will work with you to tailor a holistic solution of finance that best fits your company’s needs.

Other alternatives to a credit facility include:

• Traditional business loans - Secured and unsecured business loans with a set term and regular monthly repayment schedule are more suitable if multiple drawdowns are not required.
• Asset finance - Hire purchase and leasing options can help spread the cost of vehicle and equipment needs, offering a low-cost solution that’s particularly useful for businesses not looking for long-term asset ownership.
• Cash flow solutions - If your needs are more centred around OPEX, including covering salaries or other short-term needs, then cash flow finance will be more appropriate.
• Bridging loans and mortgages - For property-based investment, bridging loans offer a powerful short-term solution, while mortgages represent a traditional long-term answer.

To learn more about this range of solutions, explore our comprehensive knowledge base of articles.

Credit Lines for CAPEX with Clifton Private Finance

Used correctly, a CAPEX credit line is a powerful tool for businesses looking to fund expansion. With flexible drawdown and repayments, a credit line can boost investment without putting too high a strain on either existing capital or ongoing cash flow, enabling growth and seizing opportunities when other funding products may fall short.

Partnering with Clifton Private Finance will give your business the financial backing it needs to develop. Our experts will consider your business financial growth from a wide perspective, offering advice and solutions where appropriate. As a whole-market broker, we have established relationships with the full landscape of UK lenders, and can find the specialist products you need to boost your business for years to come.

Contact CPF today and speak to one of our business team to discover how a CAPEX credit line will give you unparalleled financial support for the future.

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