21 July, 2021
Tough economic times and rising finance costs make it even more important to choose the right business and asset finance structures.
We all understand that buying cheap does not always equate to the best value purchase but when it comes to finance, the interest rate (particularly in an upwards trending market) is often the primary focus and this can lead to poor customer outcomes. This is because decisions makers often overlook the importance of maintaining positive cash flows in their businesses, especially in relation to their asset loans or used asset finance structures. Financecan be complex and other more important factors like loan structure and terms and conditions can have a much greater impact on cash flow than interest rate.
It’s very common to see businesses with cash flow issues that have poor asset finance or asset loans structures for new assets and used asset finance as the primary cause for this. A typical example of this situation is a customer taking up a very low interest on a new asset (often on dealer a discounted interest rate where the dealer is subsidising the rate by reducing margin) on a term offered of 2 or 3 years maximum. The asset may have a useful life of fifteen years, but in most cases a short term like this does not make sense and won’t be able to generate enough annual surplus to pay off the asset loan and likely lead to cash flow problems in the business.
With businesses in many industries having had their margins eroded over the past ten years due to rising costs (replacement, fuel, wages, compliance, etc) and two years of pandemic disruption, it is now essential to generate cash surpluses annually to cover these costs and leave funds in the business for any unexpected costs that might arise.
In the current environment it is important that customers make a real value judgement when choosing a finance provider and look beyond finance being a commoditised product where the interest rate is the key perceived point of differentiation.
It’s critical to assess value base on whether finance structures and terms make sense in line with the remaining economic life and intended use of assetsand take into account:
If you have a long-life asset, then consider the impacts of a short term asset loan and what this might do to your cashflow. A shorter term will generally equate to higher payments and may result in negative cash flow. Your asset loan structure should take into account the productive useful life of the asset being financed and generate positive cashflow. If there is a mismatch here with a term to short, then your cash flow may be affected and other assets will need to try and generate surpluses.
If you have a short life asset, then consider whether a longer term asset loan makes sense in line with the remaining economic or useful life. A longer term in this circumstance may result in negative equity i.e. you owe more than your assets are worth.
To avoid these pitfalls, ensure that you’re dealing with a knowledgeable funder who can help you with structuring asset loans, including used asset finance options, that make sense based on your business circumstances.
Speirs Finance are a specialist Equipment Financier providing asset loans for a wide range of vehicle assets, plant and equipment, mobile plant and some fixed plant – we have a particular strength with used asset finance.We are focussed on small to medium sized businesses and we want to bring back "people dealing with people" to the finance industry. Every day we see the issues that many businesses are now encountering due to inappropriate economic debt structures and business owners not being aware that there are other options available. Through our nationwide Network of Accredited Agents, we will work with you to structure finance appropriately to match your intended use of it, with a focus on affordability – and have a local Speirs agent contact you within 24 hours.