Asset finance guide

Many businesses don’t have enough money to consider an outright purchase for assets, especially if it involves large expensive pieces of machinery, making asset finance a necessity. If this is the case with your business, you have a number of options.

Should you consider asset finance?

Asset finance makes sense for many businesses. Even if you have enough cash saved to buy the asset, investing this cash could leave you with less working capital to finance operations, or explore new growth opportunities.

The flexibility of asset finance options (with different cash flow and financial implications) can allow you to pay back these large assets over time. It’s a common tactic to match the life of the asset with the loan term. Just as you’re unlikely to use an overdraft to buy a house.

First decide what assets you need

Start by listing the assets you need in your business to:

• Operate more efficiently – for example, by using the latest technology.
• Grow – perhaps by using equipment to overcome your current production constraints or to enter new markets.
• Become more competitive – by matching the capability of your key competitors.

Calculate your return on investment (ROI)

It’s important to make a case for each asset purchase. Investors and lenders may want to see the evidence, but it also helps you make the right decisions. The easiest method is to take the cost of the new asset and divide it by the number of years you consider it will last (adding any yearly maintenance and support costs). This is the dollar amount the new asset needs to generate in increased sales, better capacity, more capability or some other measurement.

Requiring staff to make a case for asset acquisitions is a useful discipline for those lobbying for new equipment. It can quickly sort out a genuinely productive investment from a vanity item.

 

Should you lease rather than buy?

Sometimes leasing an asset can make more sense than owning it. For example:

• A lease agreement that includes upgrading fast-changing technology such as computers at agreed intervals can make more sense than owning these items. You don’t want to be stuck owning equipment with little resale value.
• Leasing expensive production machinery when you know that more efficient models will be coming shortly makes better sense than buying the machinery and then facing additional costs to compete with others.
• Leasing vehicles such as trucks can give you more flexibility than buying the vehicle, especially if demand is seasonal and surplus trucks would be standing idle.
• Leasing equipment that quickly becomes obsolete can sometimes allow you to upgrade once the term ends for the latest version.

Speak to your accountant or financial advisor about any tax implications before deciding to buy or lease.

New assets vs. second-hand

Do the assets you need really have to be brand new or would second-hand suit the purpose? Start-ups especially need to save every dollar to market and grow their business. Most businesses can save considerably on everything from office furniture to production equipment by:

• Attending local auctions and closing-down sales.
• Bidding on online auction sites such as eBay.
• Attending local closing-down sales or reviewing classifieds in industry journals.

Borrowing to own

It’s usually cheaper in the long run to buy an asset outright than lease. Taking out a bank loan can be an effective way to finance business equipment purchases that you need, especially if it’s important you own the asset from the outset.

The advantage of a loan is that it:

• Doesn’t tie up any capital and may not require additional security.
• Enables you to use your existing working capital and credit lines to generate income.
• Allows you to take advantage of cash discounts offered by the seller.

Loans should be structured to match the expected life of the asset – long-term loans for long-lasting assets such as a building, and short-term loans for assets with a shorter useful life.

Summary

The key to successfully applying for asset finance is to be prepared. Talking to your accountant, financial advisor and your bank will help to ensure you get the right asset finance package tailored to your budgets and your business needs.

You can assist your case for asset finance if you come prepared with:

• An updated cash flow forecast and business plan.
• Evidence that the business generates sufficient spare cash to service the loan.
• A pledge of available business assets and − in some cases − personal assets to secure the loan.

Be prepared also to demonstrate why you need the asset and what contribution it will make to your business’s growth and profits.