Asset Finance: Purchase or Pay-Per-Use?
Arranging finance for business equipment can seem like a daunting task. However, it doesn’t need to be. There is a range of flexible asset finance solutions to suit every organisation, and some, more than others, offer sound opportunities to put working capital to better use.
“There are three main options when it comes to acquiring new equipment; outright cash purchase, bank loan or a pay-per-use model,” explains Shane Merriman, MD at InnoVent Rental and Asset Management Solutions. “Most companies out there usually opt for either a cash purchase or a bank loan from their bank when buying the equipment that they need.”
Merriman advises that all businesses need to take the first step of exploring the different options that are available. Cash is usually the first option that many businesses opt for, based on the fact that you get to own the equipment outright with no loan repayments to worry about, which at a glance, is an attractive reason. However, owning the equipment does not eliminate the hassles associated with maintaining and updating the assets, he says.
“When the equipment depreciates in value and use, the benefits of a cash purchase are soon overshadowed with the hassles of storing and disposing the old assets. Outright cash purchases are only beneficial if the assets acquired are appreciating assets as opposed to depreciating assets. When you invest in depreciating assets, the opportunity cost of capital is lost. That initial capital outlay could have been utilised in other areas of the business. It’s just like investing in depreciating stock. Who would do that?”
The second option is a bank loan. Many financial institutions offer loans for the full cost of the asset, and the asset itself serves as surety for the loan. “Taking out a loan is a possibility, and can be a good way to finance business equipment purchases. However, it is not without its disadvantages. The interest, and the residual and balloon payments that are often tied to a loan mean you end up paying a lot more for the equipment than its worth over the loan period and, seeing as most equipment depreciates, this doesn’t sound like an appealing option,” Merriman adds.
“An option that’s often overlooked is the pay-per-use model which is far more attractive. A pay-per-use model in procurement terms operates as a rental and allows you to use the equipment during its useful lifespan and gives you the option to return the equipment to the supplier when the equipment is no longer working at its optimal potential or when you want to buy new equipment. This is a viable option for both those who do not have enough cash in hand and those who do. The pay per use model is far more flexible and allows you to choose what you can reasonably afford on a monthly basis, freeing up cash resources to finance operations or investigate for instance, new business opportunities for growth. Also, on a rental, the financial transaction is reflected ‘off –balance-sheet’ as opposed to a bank loan. The lessee reports only the required rental expense for use of the asset.”
Merriman continues: “Most equipment has a short life span. By renting this sort of equipment, your business can avoid the huge capital expenditure and the interest fees associated with bank loans and keep costs to a minimum, while still ensuring you always have the latest and greatest equipment on the market. When the rental period comes to an end, businesses can simply choose to extend the lease, refresh with new equipment or return the equipment at the end of the lease, and all with the help from the rental supplier who facilitates all processes.”
The bottom line, he says is that you need to understand how your organisation will be impacted when you finance equipment. “Before choosing any of these options, prepare a cash flow forecast to get a full understanding of how each financing option will affect the running of the business. Some options will yield short term benefits but will cause headaches in the long term. Knowing how these assets could possibly boost income and improve efficiencies will help you decide the best way for your business to pay for them.”