Most businesses have a problem with capital adequacy in their operations. Recent studies done on companies both large and small indicate that many lack the money necessary to meet growth needs. Financing options such as operating leases, capital leases, and bank loans exist, but not every business either qualifies for them or is best suited to exploit them.
The best alternative to maximize available capital for businesses is through direct funding of equipment instead of outright purchases. The beauty of direct funding is that it frees up capital so you can invest it to help generate more cash for your business.
With direct financing, you can purchase equipment from leasing agents which you can then lease to other third-party users. Through this arrangement, you don’t burden your business with an inventory of equipment that holds your cash; instead, you only enter into the financing agreement once you identify a client to whom you are going to lease.
How Direct Funding Affects Your Bottom Line
Many benefits accrue to your business from direct funding. Amongst them include:
Tax Deduction
Since you are using the equipment to earn income that is accessible, the rental payments to the leasing agent will be treated as business expenses and therefore tax deductible. Thus, you should ensure that the payments are recorded well by your accountant.
Cashflow Management
With direct funding, you have immediate access to the services of equipment without making an initial capital outlay. This means the cash you could use for this purpose is saved and becomes part of your free cash flow. Since you will tailor your rental payments with your seasonal cash inflows, you will not burden your cash reserves. Often, you can use the leased equipment as the collateral. Hence, your other assets will be free and not tied to the funding.
Flexibility in Rental Options
Direct funding companies like BSB Leasing allow you to negotiate a workable lease rental payments periodicity that works for you. For instance, you may agree on a monthly, bimonthly, quarterly, semiannually, annually, or on a seasonal basis. You can often make payments through a nominated bank account agreed upon by the contracting parties.
With flexibility in payment, it means you will never have cash-strapped operations and your books will always look healthy because you are matching expenses to revenues they help generate.
Creating a Direct Funding Arrangement
To safeguard and guarantee the equipment they are giving to you; leasing agents may require some form of collateral from you. It is in no way a statement of mistrust, but rather security that their future payments will come according to schedule. However, the beauty of direct funding is that the leasing agent will take the equipment as the collateral which means failure to honor payments can make them repossess the equipment. Therefore, before committing to any direct funding agreement, ensure that your client can meet the periodic payments and that they are sufficient to cover the lease payments you are to make to the leasing agent and leave some profit for you.