As an asset finance expert, I've worked with numerous business owners and managers in the hospitality and retail sectors, helping them secure the financing they need to grow and succeed. I want to share some insights on how asset finance can be a powerful tool for your business, even if you have the cash to purchase new assets outright.
Understanding the benefits of asset finance could be the key to unlocking new opportunities for your business.
What is Asset Finance?
Asset finance, or equipment finance, is a financial solution that allows you to acquire assets and equipment without having to pay the full amount upfront. This can include anything with an identifying number that can be physically moved, and its market value can be determined. It's particularly useful for SMEs in the hospitality and retail industries where cash flow can often be unpredictable, and large upfront costs can be a significant burden.
Asset finance can also include unsecured facilities such as Line of Credits, Overdraft, Business Term Loans and Master Limits which can be used for soft costs such as staff wages, contractor fees, insurance premiums and even ATO debt.
Benefits of Asset Finance
Risk Management
The hospitality industry often experiences seasonal fluctuations. Asset finance can provide a financial cushion during off-peak seasons, allowing you to maintain smooth operations and retain staff even when revenue is low. For instance, a Melbourne-based hotel can use asset finance to cover expenses during the slower winter months.
Unforeseen events, such as natural disasters or pandemics, can also disrupt cash flow. Borrowing funds can provide the necessary liquidity to navigate through tough times without having to close operations or drastically cut expenses.
Cash Flow Management
Asset finance helps cover day-to-day operating expenses like salaries, utility bills, maintenance, and inventory purchases. This ensures that your business maintains high-quality service, crucial for reputation and customer satisfaction.
Access to borrowed funds allows you to invest in capital improvements, such as renovations or new technologies. These enhancements can attract more customers and increase revenue over time, without the immediate pressure on your cash reserves.
With additional liquidity, business owners can seize growth opportunities, such as opening new locations or expanding existing ones, thereby increasing market share and revenue potential.
Leverage
Leveraging borrowed funds can help you acquire valuable assets such as advanced equipment or new properties. It can allow access to system and technology upgrades to improve inventory management, and supply chain efficiencies can also be accessed. This not only increases your business’s asset base but can lead to higher returns if these assets generate more revenue than the cost of the borrowed funds.
By strategically using leverage, you can amplify your returns on investment. For example, borrowing to upgrade hotel rooms can result in higher occupancy rates and increased room rates, leading to greater profits.
By opting for asset finance instead of issuing new equity, you preserve your equity and maintain control over your business. This is especially important for family-owned businesses where ownership and control are closely held.
Asset Finance in Action
Imagine you own a successful restaurant. Business is going well, and you’ve built up a substantial amount of cash reserves over the years. However, your kitchen equipment is starting to show its age, and you’ve realised that upgrading to more modern, efficient equipment could significantly improve your service speed, quality of food, and overall customer satisfaction.
Here’s why using asset finance to fund these upgrades can be more advantageous than using your cash reserves:
Preserve Cash Reserves
Your restaurant’s cash reserves are there to ensure you can cover day-to-day operating expenses, handle unexpected emergencies, and navigate seasonal downturns. If you spend a large portion of your reserves on new equipment, you might find yourself strapped for cash when you need it most. Asset finance allows you to spread the cost of the new equipment over time, maintaining your cash flow for other vital operational needs.
Consider Tax Benefits
Asset finance arrangements might offer tax advantages that you wouldn’t get if you paid outright with cash. For example, lease payments are often tax-deductible as a business expense, which can reduce your overall taxable income and provide substantial savings over time.
Consider the Opportunity Cost
If you can secure a low-interest asset finance deal, the cost of borrowing may be less than the opportunity cost of using your cash reserves. Your cash reserves can be used to invest in other areas of your business that generate a higher return than the interest payments on the finance agreement.
Maintain Flexibility
By not tying up your capital in equipment purchases, you keep your funds available for other growth opportunities. Imagine a prime location for a second restaurant becomes available, or you want to invest in a new marketing campaign. Having readily available cash can enable you to act quickly on these opportunities, potentially driving more growth and revenue.
Scenario Breakdown:
- Cost of Equipment: $100,000
- Cash Reserves: $150,000
- Asset Finance Terms: 5 years, 5% annual interest
Using Cash Reserves:
- Immediate outlay of $100,000, reducing your cash reserves to $50,000.
- Potential cash flow challenges if unexpected expenses arise.
Using Asset Finance:
- Monthly payments of approximately $1,893.
- Preserves your $150,000 cash reserves.
- Enables you to maintain operational stability, leverage potential tax benefits, and seize new growth opportunities.
Speak to Our Asset Finance Experts
Solid asset finance strategies are crucial for the financial health and growth of your hospitality or retail business. By understanding the benefits of asset finance and how to leverage them effectively, you can manage risks, maintain a healthy cash flow, and capitalise on growth opportunities.
BlueRock's team of asset and equipment finance brokers, including myself, is always at your service. Whether you're an experienced business owner or just starting out, the right asset finance approach can unlock new possibilities and drive your business forward. Submit the form below or call our Melbourne-based finance brokers today to learn more.
