20 April, 2023
There is more to business asset finance than just the interest rate and how any funding is structured needs to consider several factors to ensure that your funding makes sense and meets your business objectives.
HERE ARE 5 IMPORTANT QUESTIONS TO ANSWER and discuss with any funder when considering how to structure your business asset finance and equipment finance:
- What is the company asset being used for? - what is its useful economic life (both the real expected life and the useful life as determined by the IRD for depreciation purposes)?
It is critical for any funder to understand how you will use your company’s asset(s) and their operating environment so that the funding term and structure reflects this, particularly if the asset(s) will operate in an adverse environment that impacts their economic life or condition. Additionally, it is important to consider how each asset’s expected economic life (considering use) compares to the IRD’s determination of useful life. All this contributes to ensuring that your funding is structured in a way that makes sense, relative to the asset(s) s) finance.
- What is the cash position of your business? – how much earnings before interest, tax and depreciation is your business generating going forward?
This needs to cover all your debt repayments, be able to cover all other outgoings until income arrives each month and meeting any increased costs before you can recover them from your customers.
Also consider the strength of your business’s balance sheet:
- How much cash can be accessed to reduce the need for funding and meet any funder deposit requirements?
- How can you best leverage any equity that exists in your asset(s) to reduce the need to access cash reserves by offering additional asset(s) as security in lieu of cash?
- What funding options exist? - which is most appropriate for the asset type(s) considering the intended use, economic life and your business cash position?
With business asset finance there are different products available to you to fund your asset(s), the choice of which is the most appropriate finance option comes mainly down to the consideration of the previous 2 points and whether asset ownership is important to you. At Speirs Finance we can assist with both Asset Loan and Asset Lease products and in addition to the earlier points, the following generalised product overviews will also impact the final decision on your requested asset and equipment finance:
- Loan product (generally more suited to longer life assets that you want to own and which earn you money); or a
- Lease/Rental product (generally more suited to assets that depreciate very quickly, which may not generate cash and are not critical for you to own)
- How can your asset finance/ equipment finance be structured to maximise cash flow to your business?
Generally, for fresh acquisitions of asset(s) the extent of how much funding can be structured to maximise cashflow is product dependent (and should consider all earlier points):
- Loan products – your loan repayments will be impacted by the level of deposit provided (or what equity exists), whether your business requires seasonal structured payments or whether a lump sum balloon payment is structured at the end of the term (dependent on usage and set to reflect the future wholesale value).
- Lease/Rental products – your lease/rental repayments will be entirely driven by your chosen term, your chosen distance travelled per annum or usage hours and to what extent maintenance is or can be included within your lease/rental payments (this is determined on application).
Provided you have proven equity in your assets, it may also be possible to provide an Equity Release Loan to your business to provide additional working capital.
- How are you managing your funding risk? – does one funder control all your assets or business or have you successfully diversified to reduce or remove this risk?
If you are exposed to a single funder who for any reason gets nervous or is impacted by market events, it may severely constrict your business. Spreading your risk with specialist Business Asset Finance providers may also be a better strategy in the current environment where Banks seem currently reluctant to support Asset Finance opportunities.
With our experienced team Speirs Finance can assist you with addressing all the above questions for your business and structuring a business asset finance or equipment financing solution that makes sense, considering all the above.