Businesses can use asset-based finance to weather approaching storms
Nedbank urges businesses to use asset-based finance to survive a second wave of Covid-19.
Nedbank is encouraging businesses emerging from the first wave of Covid-19 to make use of asset-based financing in order to weather the approaching storms. It’s unclear if a second lockdown is on the cards for South Africans right now, but infection levels are climbing as lockdown restrictions are drastically eased over the festive period in a bid to provide relief to an ailing economy.
It’s sometimes difficult to picture pre-Covid-19 life, especially when the national mindset is changing and resetting to accommodate a new normal. This mindset change is testament to just how resilient and agile South Africans are in the face of change, and struggle.
It’s no secret that the economy was in trouble before Covid-19 further complicated efforts to revive growth. It can also be noted that most businesses were dragging their feet when it came to restructuring their companies to be future-fit, by digitising their operations and joining the rapidly growing e-commerce sector.
During a masterclass webinar on asset financing hosted by CFO South Africa, audience participants were polled on whether their businesses would survive a second wave. At least 76 percent of participants responded that they were able to evolve to the new normal and were confident that they had what it takes to survive the second wave.
But in another poll, on whether they were planning to finance assets for their businesses in the new year, 46 percent responded they were wary of asset finance because of economic uncertainty.
Nedbank’s head of asset finance and fleet, Shane Cadles, highlighted an alarming trend of businesses making use of overdraft facilities and term loans to finance assets.
Overdrafts and term loans undoubtedly have their place in business, but complications such as banks suddenly calling up these facilities can place the business under enormous strain. Businesses, in a short space of time, will have to pay in large amounts of capital to settle the overdraft if banks exercise their prerogative to suddenly nail down payment terms on overdrafts. Similarly, opting for fixed-term loans to finance assets may not save as much as you think.
“If you go the term loan route, typically the banks would want to use underlying security, and taking out material loans might not be the most cost-effective way to do it,” said Shane.
He pointed out that asset-based finance is designed to support big business purchases like IT hardware and vehicles, in ways other financing options are not. “Once you’ve signed the necessary documentation, in principle the assets financed serve as the underlying security,” said Shane.
Asset-based finance offers flexible payment solutions, such as skipping payments or ‘payment holidays’ during the December/January period when businesses close or have to pay 13th cheques, and revenues decrease. Asset-based finance is tailored to each customer as per their business needs, and Nedbank takes the time to sit with their clients in order to design a repayment plan that benefits their business.
The bank also absorbs much of the administration of asset finance. “If an industrial client wants to buy a fleet of trucks, we would talk to the suppliers of equipment on your behalf, get invoicing sorted out, make sure you are happy with prices, then we sign on the customer’s behalf and pay the supplier,” said Shane. Asset-based finance also offers more attractive VAT repayment structures than you would get using overdraft or fixed-term loans.
In another poll on what type of asset finance participants would consider in the near future, at least 30 percent said they were leaning towards IT hardware, and 20 percent said they would want to purchase manufacturing and earth moving equipment. In the beginning of the national shutdown, businesses had to switch to remote working overnight and had to shell out extra for IT infrastructure to enable staff to work from home.
If a second wave is indeed on the cards, businesses who’ve not yet made the move might have to consider pumping more cash into IT and hardware in order to survive post-pandemic.