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As a seasoned commercial finance broker, you undoubtedly have several hard-working SME (small to medium enterprise) clients that have plans to grow. Helping them explore a combination of working capital and asset finance loans as suitable funding levers will not only help them keep moving forward, it will also greatly strengthen your worth to them.
Key to any SME’s success, sustainability and progress is the ability to align and manage investment in assets and deploy working capital for growth.
There’s an array of options for asset and commercial finance to help you guide your client to well-informed decisions about their loan framework.
Asset Finance
Asset Finance is an increasingly popular way of funding big-ticket items such as vehicles, plant and machinery. Instead of paying a large sum upfront (via a conventional business loan) it allows the business to buy, use and benefit from the asset, spreading the cost over time with smaller regular payments, and taking the pressure off cashflow.
Alternatively, the SME can release the cash value of an asset they already own, by using it as collateral for finance to help them grow.
Working Capital
Working Capital is the funding needed for day-to-day operations such as inventory management, supplier payments, employee salaries, and marketing expenses. This can support growth by enabling the business to better manage cash flow, facilitate expansion, enable faster growth cycles and improve flexibility and agility.
In the current very tight labour market it can enable an SME to invest in their staff, who are key to their success; either by providing incentives for talented staff to stay, or by being able to offer the right salary to attract the best new hires.
Combining working capital and asset finance to give advantage
Peter Ayton, Head of Credit and Nick Rogers, Head of Sales at Banjo Loans offer some insights into structuring the two forms of finance to smartly work together.
What are some scenarios where asset finance and working capital can be combined?
A business that wins a major new contract and needs to not only buy equipment, but also hire more staff and purchase stock to fulfil that contract. They could use a working capital loan for wages and stock, and take out asset finance for the new plant and equipment.
Their broker could encourage them to consider what unencumbered assets they already own, that can be utilised as collateral to raise equity. An SME client recently arranged through their broker to leverage a $200,000 bulldozer they already owned, to raise a $100,000 asset finance loan.
In another example, a Banjo broker partner’s client was buying a North Queensland business that manufactured and installed security blinds, doors, window fittings and awnings. The business enjoyed very steady growth, with sustained margins and profits. The vendor would also be staying in the business for 12 months after the sale.
To purchase the business, the buyer took out a working capital loan over 36 months, and an asset finance loan over 60 months. The buyer also had property he could borrow against for the asset finance loan. Combining the two allowed him to spread repayments out over a longer term.
What are the triggers for when businesses can be thinking about using Asset and Equipment finance and working capital together?
Any SME client that you’ve observed is in a growth trajectory, for example is pitching for new contracts, or is developing a new product, is likely to have a need for finance to assist with that growth.
Typical industries include: construction, manufacturing and processing, labour hire, hospitality, gyms, solar panel installers.
Working capital and asset finance can also be used for obscure assets. Depending on the nature of the asset, a more flexible lender is often prepared to think outside the box. For example, Banjo recently funded a crane that was attached to a building, using working capital. The crane wasn’t an option for asset finance, as it wasn’t able to be moved or therefore on-sold, so we were able to finance it using working capital instead. Other obscure assets have included plane engines, truck fitouts and office furniture.
What are the pitfalls to watch out for?
Check your client isn’t too highly leveraged against multiple contracts. It’s important to ensure some of the profits from current contracts are ploughed back into the business. Those who push on to the next big contract, without investing in the business or shoring up their cash flow, can come unstuck.
In terms of leverage, the general rule of thumb is three times EBITDA (earnings before interest, taxes, depreciation and amortisation). There can of course be variations on this depending on the balance sheet, nature of the business, and other factors.
Whether your client wants to acquire business equipment, assets or needs help to navigate working capital or cash flow finance scenarios, talk to one of the specialists at Banjo to find out more.
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