How to get the best out of your assets

In selecting a financier, ensure it understands your business and growth ambitions, writes

FIXED assets form an integral part of any business and these can range from trucks and trailers, construction yellow equipment to industrial and specialised machinery.

Entrepreneurs should note that these assets are revenue generating and also create efficiencies in the business. When you acquire additional assets this is often part of a business’s growth and expansion plans, which is good for the economy in the long run.

Most owners have an option to fund these purchases from cash resources or short-term banking facilities such as overdrafts; this may not be in the best interests of the business.

I urge entrepreneurs to consider asset-based finance to fund the asset over a period that matches the useful life of that particular asset. In addition, for budgeting and cash flow purposes, the monthly income from the particular asset can be matched against the monthly repayment and expense or cost savings derived from the asset.

The benefit of this is that depreciation and interest charges are fully tax deductible.

Entrepreneurs should request a loan repayment profile or structure that aligns with their cash flow cycle. These can be built into the loan upfront.

Pricing on asset-based loans is traditionally offered on a linked-to-prime basis or fixed rate basis. The fixed rate option provides certainty in terms of monthly repayment for a defined period and may provide comfort especially during market volatility.

When pricing a transaction, the bank takes a view on the asset – older assets and highlyspecialised may be priced higher than low-risk assets.

Your own contribution or deposit and tenor of the loan also have a bearing on the pricing. If cash resources permit, a larger deposit can assist in reducing repayments. In summary, the repayment profile can be customised to your needs.

If the business prefers the use of assets rather than ownership, the bank offers a rental structure where the entrepreneur enjoys use of the asset and can claim rental expense as a deduction.

As an entrepreneur, your decision to fund on or off balance sheet is to be made. This is asset and industry dependent.

More specific to entrepreneurs of the Muslim faith, shari’ah compliant asset finance loans are available. Using the concept of Ijaarah, which is similar to leasing, the entrepreneur has access to a vehicle or other movable asset for a fixed period and price.

This includes unique advantages, such as 100 percent financing and tax benefits.

When considering the purchase of equipment and vehicles, ensure you approach reputable dealers and manufacturers. These dealers should have a solid reputation and the product should be supplied with warranties and after-market service. The bank may also offer after-market warranties for certain vehicles. Some financial institutions partner with dealers and offer preferential deals.

It is worth investigating these deals as they are often subprime, have relaxed deposit requirements and include buy back options. Depending on the nature of your business, you may require equipment and machinery that is only available on the overseas market.

Procurement of these assets presents additional risks. It is beneficial to facilitate the transaction through an asset finance house that is skilled and equipped to mitigate inherent risk in import deals, thereby allowing you to focus on your core business.

Certain production lines or custom-made factory equipment has to be built on site over months and is complicated by the provision for various service providers.

For example, if you were to set up a beverage production and bottling plant, you would be required to make part payments to various suppliers over time. Your cash flow could be better managed by facilitating an interim loan from the bank.

This frees up your monthly cash flow and repayment of your loan only starts once the plant is generating revenue. This provides flexibility.

If you have vast cash resources and still wish to make use of a bank’s assets finance facilities, consider an asset finance loan facility with access component. This highly flexible structure will afford you the advantages of bank funding with quick access to cash when needed. If your business is highly capital intensive which requires frequent asset purchases, you may want to engage with your bank to set up a pre-approved facility to fund all your future capital expenditure needs.

This will ensure your business operates seamlessly. In selecting an asset financier, it is important you partner with a provider that understands your business and growth ambitions.

Sarvas Naidoo is Absa regional sales manager in KwaZulu-Natal.