24 June, 2021
Cash poor but asset rich?....observations from a Business Asset Finance Company
Many businesses find themselves facing this question and having to consider how they ended up with no cash in the business and at the same time have either no or low debt relative to the value of their assets.
Paying off debt quickly has always been part of Kiwi business culture, but most businesses now face more competitive pressure than they ever have resulting in lower margins, increasing compliance costs, the need for better information systems and higher wages to retain staff – all of which have a significant impact on cash flow.
Although times have changed our attitudes and expectations around approach to debt hasn’t and if you find yourself in a “cash poor but asset rich” position then it may be time to rethink things financially and examine whether the traditional approach with your business asset finance is actually working for you.
Dependent on your specific situation your options with business asset finance to keep more cash in your business may be:
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For new acquisitions – where possible, consider lower deposits and align the term of your business asset finance to the economic life and your intended use of the asset(s) i.e. if it’s a long life asset then fund as long as you are practically able to.
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For existing asset funding – where there is equity, then lengthen the term in line with the remaining economic life of the asset(s) and your intended exit strategy around each.
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For freehold assets – consider financing these assets to release equity that may be tied up in them to inject working capital back into the business.
Maintaining cash flow is critical to all businesses but many focus too much on sales and gross margin, others may offer generous sales terms to win business, which creates long gaps between work being completed versus when they’ll actually be paid. The cost of Capital Equipment replacement is also often underestimated.
Business asset finance can be a tool you can use to promote a better cash position but this is contingent on adopting funding structures that make sense to your specific situation and what your current funder(s) will allow. It is important to maintain a good relationship with your funder(s) and to work with financial institutions that demonstrate the capacity to add value to your business with guidance around debt structure relative to the type of assets you operate.