As the econmoy tightens and interest rates start to squeeze, companies have to plan their capital replacement and weigh up the best financiing options.
Keith Watson, head of business support at Standard Bank, says: “Purchasing of equipment can be one of the largest investments a company makes but few entrepreneurs, especially those starting out, have the means to fund the purchase. There are various sources of finance including personal savings, family and friends, equity finance and bank finance.
“With all financing options, it is important to assess the cash flow of the business and the ability to meet repayment obligations. One should also give consideration to the particular lending requirement and match this to the most appropriate type and source of funding.”
Broadly speaking when buying office equipment, plant or other assets, the most viable options include vehicle and asset finance or a business revolving credit plan.
When considering asset finance, one has two main choices – renting or buying. With renting, full maintenance lease and operating rentals are the most common and are usually written for a term not exceeding the economic life of the vehicle. You pay a monthly fee and ownership of the vehicle reverts to the funding institution at the end of the rental term. Residual values are made use of to lower the monthly fee.
The key difference between a full maintenance lease and an operating rental is that with the former the maintenance of the vehicle is included in the monthly rental and the maintenance is monitored by the lessor.
Among the key advantages of a full maintenance lease and operating rentals is that there is no initial cash outlay in full or an exorbitant down payment. Rental payments are deductible as operating expenses provided the agreement meets SARS criteria. In addition, the financial institution bears the risk with regards to the residual value.
There is the disadvantage of possibly losing certain tax benefits that go with vehicle ownership. Also the cancellation of the contract can result in payment of a penalty fee.
When financing equipment, installment sales and financial leases are most commonly used to finance the asset.
“With all of the finance options, it is important to remember that payments can be structured to suit the individual operation’s cash flow. For example, an access finance facility, which may only be linked to instalment sale and financial lease agreement, allows for payments into the access finance account in times of strong cash flow, generating savings on interest charges.
"And in turn these surpluses can be withdrawn during times of weaker cash flow for use in other areas of the individual’s operation.
“Business owners need to analyse and evaluate future capital replacements carefully. Often, large amounts of money are committed, without consideration for the effective utilisation of an asset or the future trade value in the event of a sale," says Watson.