Guide To Asset Finance in South Africa

Loans can be such a tricky and time-wasting activity. Different lenders have different requirements, waiting periods and collateral before they give out loans. For small businesses, these hindrances can be difficult, especially loans that need collateral. However, there is an option for those without collateral and that’s called asset finance.

Asset financing is when a company uses its balance sheet assets (including short-term investments), inventory and accounts receivable to take out a loan. Asset finance basically means that you provide the lender with a security interest in your assets.

As South Africa’s small to medium sized enterprises (SMEs) sector continues to grow, having loan options such as asset finance will only serve them positively.

In this guide, we look through the concept of asset finance in South Africa and how it helps small businesses.

There are various types of asset financing options available for small businesses in South Africa.

Vehicle and Equipment Leasing

Equipment leasing involves leasing equipment with the goal of owning it by the end of the contract. During the leasing/loan period you are required to make scheduled payments to the lender, and you are responsible for the maintenance of the equipment. Once the lease is done, you can extend it, return the equipment, upgrade or buy it using a balloon payment.

Vehicle asset financing enables you to find a provider who will maintain the vehicle for you. During the lease period, you pay installments over an agreed time period. Once your agreement period is finished, the lease provider is responsible for the disposal of the vehicle.

Hire Purchasing Versus Leasing

In hire purchasing, the buyer is responsible for the maintenance and insurance of the asset. In leasing, the owner of the asset is responsible for handling the maintenance and upkeep of the asset.

Furthermore, hire purchase agreements are often on fixed terms offering less flexibility. In comparison, leasing often has changing terms providing a more flexible option.

Operating Lease vs Finance Lease

An operating lease is used when you need special equipment for a short period of time, or you never want to own it. You rent the asset over the agreed time and make regular scheduled payments while you have the equipment. Operating lease also allows you to upgrade the equipment regularly, and costs are based on equipment costs.

Lease Financing

A finance lease is an agreement where a lender buys an asset on your behalf and rents it out to you. During this time you will make monthly payments until you cover the cost of the asset and pay interest.

Once your finance lease is done, you can decide to extend the rental period, return the asset or sell it to a third party on behalf of the lender. Basically, you will not own the asset, but you are responsible for paying insurance and maintaining it during rental.

These are just some of the types of asset financing options available. Remember to choose the option that best aligns with your needs and budget.

As we all know, each type of funding or financing has certain requirements, and it’s no different for asset financing.

Credit Score and Documentation Requirements

When it comes to the requirements for asset financing, lenders will usually have their own requirements in combination with general requirements. Some of the requirements include:

• Your business must be registered with the Companies and Intellectual Property Commission (CIPC)
• Trading history of up to two years
• Your business must have a profitable track record
• Clear credit record
• Be able to pay a deposit of at least 20% of the asset purchase price
• Be able to afford the instalments based on cash flow history

In terms of documents, this is what you will need for asset financing:

• Company registration documents or trust deed, and master’s authority confirming trustees
• Certified copy or original copy of ID of beneficial shareholders
• Signed annual financial statements not older than 12 months from date of application
• 12 months cashflow forecast of your business
• Statement of assets and liabilities for all beneficial shareholders/members
• Signed management accounts that are not older than 3 months from the date of application
• Last 12 months bank statement of your business
• Confirmation of bank account details issued by your bank
• Quote/pro-forma invoice for the asset to be financed from an accredited supplier

When it comes to your credit score as a requirement, that is dependent on the type of asset finance you want and the status of your business. For example, if you are looking to use high-value assets that your business already owns as collateral for your loan, the lender’s decision will be based on the value of your asset.

In conclusion, your credit score is not important in asset financing, it’s more important that you can afford to pay back the loan. Remember that each lender will have their own requirements that you will need to adhere to.

When it comes to finding the right asset financing offer for you, you will need to go through various platforms. Each lender will have their own requirements and different offerings under asset financing.

When getting asset financing, you use your business assets as collateral. The process typically involves the following steps:

• Asset evaluation: This part is done to determine the value of your assets.
• Loan application: You will apply by detailing the assets you will use as collateral
• Approval and funding: Once your application has been approved, you will receive the funds and can begin using them for your business.

Common Reasons for Application Rejection

As with any loan application, even in asset finance there are chances your application is rejected. Some of the reasons this happens are:

• Poor credit score: A bad credit score indicates to lenders that your business is financially unstable.
• Insufficient collateral: If your cash flow projections are inconsistent, it shows lenders your business is unable to generate steady revenue.
• No collateral: If you don’t have assets to offer or assets that are not considered high-value, lenders will be hesitant to approve your application.
• Incomplete application: If your application is missing any documents or has outdated documents, lenders will not approve it.
• Limited trading history: Lenders typically want a business that has been operating for at least 2 years. This demonstrates business viability and consistency to the lender.
• High debt-to-income ratio: Lenders want to see that you are able to manage additional debt. If your current debt is too high compared to your income, your application may face challenges.

Like other funding/financing opportunities, there are benefits and risks to asset financing.

Tax Benefits and Depreciation Advantages

When it comes to tax benefits in asset financing, you can expect the following:

• The asset you lease will have monthly payments which will be recognised as an expense in your financial statements. As the lessee, you will be able to claim these payments as income tax deduction.
• When you do finance leasing, you will not be able to recognise the loan on your financial statements. You will also not be able to claim these payments as part of your income tax deduction.
• In terms of VAT, you can claim the input tax on the full purchase price of the asset at the beginning of the lease.

When it comes to depreciation, asset finance enables you to spread the cost of an asset over its expected useful life. This gives you a more accurate view of the value of the asset. In terms of tax, these are the benefits:

• Allows for wear and tear: You can claim a tax deduction for the depreciation of assets. This will help your business offset the natural decline in value of the asset due to everyday use.
• Claim the wear and tear allowance: Depreciation reduces the accounting profit before tax (PBT) of your business. If you want to determine your taxable income, you can add the accounting depreciation to your PBT and deduct the wear-and-tear allowance. This will help reduce the taxable income of your business.

In asset finance, there are risks of defaulting and repossession. If you default, it means you are unable to make repayments on the loan. There could be various reasons for this such as market changes, unexpected expenses or poor financial management.

If you default, you could face consequences such as:

• Loss of your asset
• Damage to your credit score
• Legal action against you from the lender

When it comes to repossession, failure to meet your financial obligations (repayments) may lead to your asset being repossessed by your lender. Additionally, repossession can have a negative impact on your business, disrupting operations and impacting your ability to serve your customers.

For SMEs asset financing offers a more flexible and efficient way for them to get the equipment, vehicles and technology they need, without the constraints associated with traditional bank loans.

In traditional banks, the requirements are usually stricter than private lenders. Banks require applicants to have collateral, a good credit score and a strong cash flow before you can apply.

In conclusion, asset finance is a much more flexible, cost-effective, efficient and tailored financing solution for SMEs looking to grow their businesses.