Capital Equipment News February 017

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CAPITAL EQUIPMENT NEWS FEBRUARY 2017 2
EDITOR'S COMMENT
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.
SEEKING NEW FUNDING
OPTIONS
@CapEquipNews
Munesu Shoko – Editor