For small business who finance equipment and machinery it’s essential to have a smooth and efficient process. Beside a commercial mortgage or finance for a buy-out, asset finance will usually entail economics of real substance. Getting it wrong could cause problems beyond just the immediate cost implications with legal headaches and customer liability. So its important to pin down the key factors and get a firm grip on potential risks that could arise.
The Obvious Five:
These are the factors that most companies correctly focus on.
1. Speed and Timing. It is perhaps irritatingly simple for me to emphasise that is prudent to always consider asset requirements and associated funding well ahead of the time specific equipment is needed, however there are no shortage of companies who end up caught ‘between a rock and a hard place’ because of failing to adequately plan. This can then lead to companies being forced to accept poor terms on their finance. On EquipmentConnect our tech ensures that finance applications are turned around in hours to offers.
2. The effect on your balance sheet. Depending on the form of asset finance you choose, you may increase the level of debt on your balance sheet. Finance Leases, Hire Purchase Agreements and Loans will all increase the gearing. This may make it more difficult to source finance in the future especially if the corresponding asset isn’t strong. Operating leases and rental agreements on the other hand will keep the assets ‘off balance sheet’ and in the financial sense show your company as leaner and demonstrate a higher return on assets.
3. The effect on cash flow. Most important is how finance payments will effect monthly or periodic cash flow. Cash is always king and this principle is especially true at a small business where arranging an urgent cash facility can be challenging.
4. The overall cost of credit including the interest rate. Of course considering the monthly repayment in isolation is vital but ultimately you expect a good deal. A fair deal. So, pinning down the funder on the total cost of finance is important. A 7% flat rate might sound innocent but over 5 years of repayments it adds £35,000 of interest to a £100,000 of finance.
5. The level of security requested: There is very clear trend in small business finance to request increasing levels of security from business’s and individuals behind the business. Sometimes it is the case that these additional layers of security allow a finance house to feel more comfortable when they make an irresponsible lending decision. By offering up your commercial property, existing business assets, future revenue or personal property as security you leave yourself and your business much more exposed in a recession or other negative headwind.
The Tricky Five:
These factors are often overlooked and can lead to a nasty slip.
1. Operational Requirements: Financing new equipment if not organised correctly can have a disruptive impact on operations. Generally your equipment supplier will have a good grip on delivery time but of course, if finance is delayed that will impact your ability to take hold of the equipment. Also a funder or lessor who is over zealous may cause unnecessary hassle with too many routine asset inspections or drown your admin staff with paper work.
2. Flexibility on terms: One of the most common overlooked factors is term flexibility. Perhaps, at some stage your company will expand overseas and you wish to move your equipment abroad necessitating an earlier than planned purchase of equipment with a HP agreement. Maybe business will soften in years ahead, leading to less use on equipment and less affordability of finance payments. A funder who can be flexible is very valuable.
3. Relationship: This is especially important for more complex, larger asset finance facilities. Of course, relationship doesn’t have to be defined in the narrow local sense – Being a member of the same golf club is useful but ultimately it is in a business context that you require trust. Good people ultimately ensure good business so always, tech enabled or not, ensure your funder is staffed by professional folks with the right long-term incentives.
4. Maintenance and Insurance: Asset finance providers often generate substantial sums from bundling compulsory insurance and maintenance contracts. Of course, it is understandable that insurance and maintenance is required for equipment that ultimately is either the property or collateral of the finance company but it is important to check how competitive the pricing is.
5. Certainty of execution: Business is uncertain by nature so ensure your suppliers respect your time. This includes suppliers of financial services. Always make sure you see headline credit criteria before applying and feel free to ask if approval is likely before applying. Choose providers who use the latest tech to ensure the process is as easy as possible. The days of scanning in and emailing documents should be long over.