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4 January 2016

Giving businesses room for cash flow


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Giving businesses room for cash flow

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Access to regular capital flow provides the life-giving air for businesses to breathe. The characteristics of an equipment finance solution make it an effective way for organisations to avoid choking.

Regular cash flow provides life-giving air for businesses to breathe. The bigger the company, the bigger the lung capacity, though the need for oxygen remains the same.

When cash flow is poor, it can choke the life out of even the best businesses. Research from the Australian Securities and Investments Commission (ASIC) [1] shows that cash flow has remained a consistent problem for Australian organisations for some time.

Equipment finance and leasing solutions play a role in 40 per cent of all capital expenditure on equipment in Australia today.

In ASIC’s 2012-2013 insolvency statistics, “inadequate cashflow and high cash usage” were named as the second most common causes for business failure, with 41 per cent of respondents (3,829 businesses) nominating this as their most critical problem. In the most recent 2013-2014 report, the issue had jumped to be the most frequent cause of business failure, as 43 per cent (4,031 businesses) listed it as the reason for failure.

The effects of poor cash flow dramatically restrict business growth, providing less clarity and foresight into the organisation’s spending potential and can have detrimental impacts on productivity. However, such significant effects of poor cash flow can be drastically reduced if businesses finance their assets and equipment in a sustainable way. This is one way equipment finance can help.

Australian businesses on board

November 2015 figures from White Clarke Group show that equipment finance and leasing solutions play a role in 40 per cent of all capital expenditure on equipment in Australia today. Over the past few decades, more and more Australian organisations have begun to adopt the solution as a way to keep their cash-flow pipelines moving.

The Alleasing Equipment Demand Index (the Index) for September 2015 shows that 30.5 per cent of all organisations intend to fund their asset acquisitions through an operating lease, and 19.3 per cent through a finance lease, while only 20.9 per cent will buy outright.

It is large, capital-intensive asset or equipment investments that can stem a small business’ cash flow. However, when these purchases can be spread out across the operating expenditure budget, it allows a business more room to breathe, reducing or eliminating the chances of having their financial airways restricted.

Benefits of equipment finance

Utilising an equipment finance solution such as an operating lease or rental is designed to meet the challenges faced by businesses all over Australia, and many of the advantages of doing this come about thanks to its flexibility, which puts less strain on cash flow. Some of the benefits of equipment finance solutions that can assist in this way include:

1) Payments are predictable

An equipment finance solution can spread the commitment of acquiring new assets over the term of the lease agreement – often between two to five years. Lease payments become operating expenses and are regular payments agreed to at the outset of the lease period. Therefore, payments are easier to budget for and, if you choose an operating or finance lease, don’t require spending a lump sum all at once, which can frequently be a reason for cash flow difficulties.

2) There’s often no deposit required

In a similar way, there’s often no requirement to pay a deposit with equipment finance, which would again impact cash flow. A down payment on a bank loan can be as much as 20 per cent, while some equipment finance solutions can completely eliminate this cost, instead absorbing it into a sustainable payment structure.

3) It doesn’t tie up capital

With smaller, staggered payments, an equipment finance solution can help businesses match the revenue-creating potential of the new assets so cash flow can be maintained. This is particularly desirable for businesses with unusual cash flow characteristics or whose cash flow is dependent on uncontrollable variables. For instance, the Index shows that 57.1 per cent of organisations in the agriculture, forestry and fishing sector plan to use an operating lease, while only 21.4 expect to buy new assets outright. Companies in these industries are often dictated to by a huge amount of variables outside of their control impacting their ability to create income, so utilising an equipment finance solution means access to capital that isn’t tied up in large, one-off purchasing costs reduces risk and provides flexibility to keep funds aside for any unexpected outlays.

[1] http://download.asic.gov.au/media/1914730/rep412-published-29-september-2014.pdf

[2] http://www.whiteclarkegroup.com/knowledge-centre/view/australia-asset-and-auto-finance-country-survey-2015

NB. The research and publication of the Equipment Demand Index was conducted under Maia Financial’s previous name, Alleasing. 

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