Assessing the options in asset finance for medium sized businesses
According to the Australian Government’s Financial System Inquiry, Australia’s two million small and medium sized businesses employ almost 70% of the workforce and are major drivers of economic growth. They account for over half the output of the private sector, and are a significant source of innovation in the economy.
Sounds like they’re in great shape – but the hard reality is life is tough on the front line. Most growing businesses struggle to finance their growth, and cash flow is by far their biggest and most constant headache. Consider this statistic from the Reserve Bank of Australia’s Research Discussion Paper “Why do companies fail?”:
“The effect of liquidity is particularly important; a one standard deviation rise in the cash-to-assets ratio lowers the probability of failure by around 19 basis points over one year, or 2.8 percentage points over the first ten years of life for the median private company”.
In other words, a company with liquidity significantly increases its chance of surviving and thriving.
Traditionally a small-to-medium businesses’ first port of call when looking for finance are the banks. However, banks can be notoriously difficult to secure a loan from, often because their business models and expertise are more suited to providing debt finance to established, larger corporations, but in others it’s because their processes are not flexible enough to respond to new businesses models.
And even if the banks do lend, small-to-medium sized businesses can end up paying a lot more for the debt than simply the cost of the loan. Banks can be glacially slow to process loans, are weighed down by arbitrary rules and strict, inflexible criteria and are unable to offer financing options which respond to specific business needs.
The result is that many business owners find themselves with few options when it comes to financing. It’s what the Financial System Inquiry referred to as ‘structural impediments to accessing finance’.
The good news is that the non-bank lending sector offers a real alternative. As it continues to grow, thrive and innovate, the past few years have seen numerous new and innovative financing options developed, and made available to small and medium sized businesses.
Non-bank lenders offer different, more flexible products than a bank.
Non-bank lenders, particularly in the area of asset finance have traditionally existed to provide all businesses, but particularly small and medium sized businesses, with ways of financing the capital equipment and other expensive items they need to grow their business, without tying up cash needed for other priorities.
Because non-bank lenders are focused on small and medium businesses, they understand what is required when it comes to finance – and their products are structured to respond. They are usually more flexible and responsive than banks in a variety of ways. Payments on loans can be structured depending on business needs – for example, payments can be locked-in to provide certainty of outgoings. Rules regarding collateral for specific loans are also more flexible than the banks, and can include non-traditional forms of collateral, such as outstanding invoices or equipment.
A case in point. Equipment finance for your business, your sector
There are two main options when it comes to equipment financing – leasing or financing – both of which have pros and cons depending on the specific business model.
When you lease a piece of equipment (whether it be a computer, truck or other vehicle) you are essentially renting it as you might rent a house or apartment. Usually you will not need to provide any money upfront, or any collateral. You will only be held responsible for flat monthly payments for the duration of the lease. At the end of the lease you can terminate the lease, renew it, or alternatively purchase the equipment for an agreed amount (usually fair market value).
Equipment financing is more akin to a loan, because it allows you to purchase the equipment outright. The amount that you will be able to borrow will depend on the type of equipment you are purchasing – and the equipment itself becomes the collateral for the loan.
The potential downside for both equipment leasing and financing is the interest rate of offer. And this is where it pays to do the research and understand what is on offer in the market. As non-bank lending becomes more competitive, the options are many, and can be surprisingly cost effective when compared with bank finance. It’s important to look at the terms and conditions in detail and to understand the total cost over the life of the finance facility.
For businesses in sectors where machinery and/or technology turns over rapidly, leasing can be a perfect option, because it allows for equipment to be upgraded regularly. In the case of equipment financing, the equipment itself is used as collateral, which means that other collateral is unnecessary – and whereas most banks want to see years of financial history and require reams of documentation – non-bank lenders don’t.
In addition, there may be tax benefits, as there are annual tax deductions available for businesses leasing equipment, and in some cases the cost of financing may be entirely tax deductible.
A good finance partner can make or break a business
The marketplace is competitive. Many small and even medium sized businesses fail, in many cases on the basis of their financing. To have the best chance of success, growth-oriented small and medium sized business owners need a finance partner which understands the specific finance needs of their business. A partner which is nimble and responsive, understands that business owners are time poor so provides fast, flexible solutions within a streamlined process.
For most smaller businesses, this is not a traditional bank.
If you are a business owner looking for peace of mind, and a reliable, simple form of finance with a partner you trust – taking the time to talk to non-bank lenders and and to look at what they can offer, particularly in terms of asset finance, might be the most important business decision you ever make.