Capital Equipment News February 2017

EDITOR'S COMMENT

SEEKING NEW FUNDING OPTIONS

C onstruction, mining and transport companies, together with their related contractors, depend on equipment and vehicles to get their jobs done. In essence, new equipment makes the difference between stagnation and growth, but financing can be a real headache. While equipment are assets they should have in their businesses, what happens if the business can’t afford such big-ticket purchases? Many of these items run into millions of rands, and for smaller businesses still finding their feet, big up-front costs may be well out of reach. Yet more established companies often don’t want to buy an expensive piece of equipment outright, even if they can afford to do so – because the money could be spent on other things to benefit the business. That’s where equipment finance comes in. There are lots of different ways you can fund large equipment purchases, but what are the best options? I recently spoke to an executive of a leading independent asset rental company which currently finances over R3-billion worth of assets for more than 400 organisations across most industries in South Africa. He is of the view that while large mining houses and construction companies have traditionally purchased yellow metal equipment outright, there is an increasing trend towards alternative funding methods that necessarily don’t call for large capital outlays. He argues that while purchasing equipment outright gives businesses the benefit of ownership, when it comes to yellow metal equipment, this so-called benefit may be overweighed by those offered by alternative funding options. In the

current operating climate, companies seek to improve their cash-flows, which means that capital expenditure needs to be cut by any means possible. Of late, we have also seen that every OEM has in some way tried to bridge the funding gap for its customer base through in-house financing schemes. The executive from the independent asset rental company argues that OEMs’ and their dealers’ expertise is in machinery, not necessarily in funding, and they are understandably cautious to put these assets on their own balance sheets. Speaking of options, operating leases arguably offer a solution that protects both customers and suppliers. Operating leases mean that the asset is financed off the balance sheet, thus protecting key debt-to-equity ratios while freeing up cash-flow for businesses to focus on their core activities. In this case, the lease is financed by a provider that takes the residual asset risk. This means neither the customer nor the supplier needs to take the risk. This type of lease is also compliant with IAS17 – the relevant accounting standard – and allows companies to claim back the entire lease as an operating expense. Operating leases also allow for flexibility once the lease period ends. Customers can return the asset, choose to continue leasing it at a reduced rate for a new lease period, or continue leasing it on a casual basis. I believe the benefits and potential financial risks of acquiring new or used gear should be clearly determined before any decisions are made. There are different ways of satisfying a company’s equipment needs. There is no right or wrong in these options, they just suit different situations for different companies.

Munesu Shoko – Editor

capnews@crown.co.za

@CapEquipNews

CAPITAL EQUIPMENT NEWS FEBRUARY 2017 2