What is Asset Finance?
In short, asset finance in South Africa is a type of financing used by businesses to obtain assets, such as equipment, that are necessary for their business to function and grow. A regular amount is paid over a certain period of time for the use of the asset, preventing the business from having to pay the full cost of the asset at once.
Why Use Asset Finance?
New assets, especially in cases of specialised equipment, can be a daunting thing for a business to obtain, especially where cash flow is tight or if you are just starting out. In many cases new assets (or the lack thereof) can be unaffordable and a black hole in your business’ books and ultimate efficiency.
An asset finance solution can make these assets affordable, whether it be the need of a mere telephone, printer or even heavy lifting cranes.
Advantages of using Asset Finance in South Africa
- Asset finance solutions gives your business access to new assets without the the cash flow disadvantage of having to buy the asset outright.
- Finance agreements can be tailored to your business’ specific needs and, depending on the finance provider, there could even be flexibility on the term and repayment schedule.
- With the available finance solutions, your monthly budgeting is made easy, as payments are usually fixed. This allows you to plan properly and improve your cash flow management.
- Finance providers can provide you with expert knowledge around a certain asset, as they often specialise in that specific asset.
- As smaller payments are made and spread out over a period of time, rather than having to pay one big lump sum, working capital is more readily available for your other business needs and expansion.
Due to interest and fees, the total sum of payments you will have to make will be higher than the actual cost of the asset in the long run.
Different Types of Asset Finance
With leasing, the lessor (the finance provider) will buy the necessary assets (for example equipment) on behalf of the customer (your business, being the lessee). They will then lease the asset to your business for a fixed amount of rent over a predetermined period of time. Your business, therefore, has access to the asset for the period of lease, without the ownership of the asset transferring to you or your business. At the end of the lease period, there might be an option to purchase the asset at a nominal sum.
2 main types of leases
1. Finance Lease
With a finance lease, the value of the asset will be recognised as an asset in your business’ balance sheet and financial statements. The lease payments will be recognised as an expense, thus passing through the profit and loss account. With a finance lease the full value of the equipment plus interest will be repaid over the pre-determined lease period.
2. Operating Lease
With an operating lease, payments are also recognised as an expense (appearing in the profit and loss account). But these payments are only made to the lessor for the use of the asset while it is needed. Perks with this type of lease would be that the lessor will most likely take responsibility for the maintenance of the asset, as the asset is taken back by the lessor after the lease period. Important to note, however, is that with this type of lease, the asset is not shown as an asset your business’ balance sheet or financial statements. An operating lease will be the more appropriate choice in cases where your business will not need the asset for its entire working life.
Advantages of Leasing
- With leasing, you avoid the depreciation of the asset in your books, preventing the risk of the value of the asset falling as you use it.
- There is no debt involved, reducing your debt exposure and increasing your business’ liquidity
- With an operating lease, your return on net assets will be increased, enhancing your balance sheet and income statement. By using off balance sheet financing, you enhance your business profit.
- There are various tax advantages involved in choosing one of the leasing options of financing. An example of this is the tax efficiency above standard term loans, as the lease payments are booked as an expense - therefore being tax deductible.
- This type of finance is very accessible to businesses, as the financing is technically secured by the asset being leased, as the asset is still owned by the finance provider.
- The risk of owning obsolete equipment is reduced, as you have a choice to only pay for the asset as long as you use it.
Hire Purchase is a means that your business can use to purchase an asset on credit. Ownership of the asset will therefore ultimately transfer to your business. The finance provider purchases the asset on behalf of your business and owns the asset until the final credit instalment is paid. When this is paid, ownership (title) of the asset transfers to your business.
Advantages of a Hire Purchase
At the end of the agreement, your business will be the owner of the asset. This enables you to later sell the asset at a lump sum.