Get the best from equipment finance for your franchise

Toni Fritz

Anyone who owns and operates a franchise will tell you that cash flow determines whether your business succeeds or not. However, unexpected expenses can occur and many will be linked to the need to urgently buy or replace equipment. Therefore, the potential for a negative impact on cash flow always exists.

When expensive equipment is needed urgently, the solution to obtaining the equipment also means preserving cash flow as far as possible, says Toni Fritz, Head of Vehicle and Asset Finance - Business at Standard Bank.  

“When times are tough, paying out hard-earned cash for operational necessities is often not an option. Financing is then, the only realistic solution. However, how you raise the money and what the final cost will be to you, should be carefully considered before you commit yourself to a loan.”

Things to consider when seeking finance:

• The monthly repayments

Research your options and do some calculations. You could find that, by paying a little more every month you could reduce the loan period by a year or more. Capital and interest savings can be significant.

For example, if you borrow R 25 000 over a period of 48 months at an interest rate of 9.25%, the monthly repayments would be R 814.91. By reducing that period to 36 months at the same interest rate, the monthly repayments are R 996.99. So, if you can afford an additional R 182.08 per month, you can pay off the loan 12 months earlier, and save a substantial amount on interest.

• The interest rate you are required to pay

Interest rates can vary and depend on a number of factors; including  where and how often you seek finance. If you have a personal account and business account at the same bank, it will be easier for the bank to evaluate your application. Of course, the loan will also depend on your personal and the business’ credit rating. 

If you have the time, shop around for the best interest rate you can get. Negotiating rates can save a considerable amount in repayments.

• Check to see that you will be able to pay the debt off quicker 

The quicker you pay off a loan, the less interest you will have to pay. 

• Matching the lifespan of the equipment to the repayment period

Think about the projected lifespan of the equipment. Taking a loan that will take you four years to repay when the equipment has a projected lifespan of three years, could result in you still paying for an item you no longer use, because you would have had to buy a new item. Paying for equipment that is no longer in use is not being business savvy and will negatively affect your business’ profitability

Once you have done your basic research, begin looking for the finance you need. It is important that you place your business with a reputable financier.

Generally, the different types of financiers are:

• Banks, which will apply their particular set of requirements on a loan.
• Companies who sell machinery and equipment but offer finance packages with the purchase. 
• ‘Rent to buy’ operators who offer to ‘rent items’ over a period with the purchaser having the option of upgrading equipment during the term of the rental. These sales also often include a service and maintenance component.

“Companies that promise instant loans with the minimum of paperwork and very little personal contact will generally charge higher interest rates.  Always exercise caution and ensure that the company you are dealing with is a registered credit supplier. This means that their operations are legitimate and that they are registered with the appropriate authorities,” says Mrs Fritz.

“Also, read any contracts that you are offered. There are often administration and insurance clauses added to contracts regardless of where they are obtained. It is your right as a consumer to indicate that you do not want the insurance offered by a financier.  You can then arrange your own policy, but will have to prove that the item you have financed is insured.  The financier can at any time demand to see this proof of insurance.”

The bottom line when seeking finance for equipment is that the equipment you are buying should add to productivity and be a necessity for your business.

“We would all like to have the best of everything. The real test when financing equipment should be checking that it is vital to the business and it has the essential functions you require.  A machine that offers amazing functionality is great, but when you use only 50% of its features you are paying for benefits you won’t use.” 

“It is also wiser to replace a machine that works 24 hours a day, rather than replace an office computer because it is too slow. Financing is a commitment and should be focused on making your business better and earning you returns on your investment,” says Mrs Fritz.