Inadequate capital is a big issue that affects most businesses. Recent studies show that around 60% of all businesses lack money to meet growth needs. Around one-third of all surveyed businesses say that their biggest issue is the lack of funds. Many financing options such as bank loans, operating and capital leases exist. However, a more efficient alternative that will help you maximize the available capital involves leasing inventory rather than buying it. That is especially important for companies struggling with limited capital. Direct funding of equipment frees up capital in addition to generating more cash when done properly.
What is direct financing?
With direct financing, companies are able to purchase equipment from leasing agents. However, they do not use the equipment to run their daily activities. Instead, they lease them out to other businesses. With direct funding, you are able to buy inventory after you have gotten a client that you can lease it to. That should sound good to any business that needs to have software or equipment available for its clients but lack the resources necessary to hold onto larger inventories that they might not even use.
Creating a direct finance lease
Before entering into a direct finance lease agreement, a leasing agent will require you to provide personal collateral as a guarantee. That should not necessarily mean that they do not trust you. It is a way of guaranteeing that you will complete all the future payments according to the schedule. The collateral helps protect the leasing agent’s interests. In the event your company is unable to meet the direct lease agreement terms, the leasing agent will manage to take back the financed equipment. Therefore, before entering into an agreement, you should ascertain that the payments from your client would meet the payment terms while creating more profit for your business. The leasing agent and your clients will not enter into any contractual agreement.
Features of direct financing
- Tax deductible
The rental payments are tax deductible if the lessee uses the equipment to earn assessable income. You should, therefore, speak to your accountant about the available tax benefits.
- Cash flow management
Finance lease provides you with immediate access to the equipment without an initial capital outlay and you can therefore properly utilize your daily cash flow properly. You will also manage to tailor your rental payments to match your seasonal cash flows. The leased equipment is usually adequate security for that particular lease and you will therefore not use your other assets as security.
- More flexible rental options
Get the equipment you need and start making rental payments. You can make the rental payments on monthly, quarterly, annually or semi-annually, irregularly or seasonal basis. You can make the payments from a nominated bank account, through BPAY or by direct deposit. The lessor has to fix the rental payment costs. You will therefore know the repayment amounts.
Companies that can benefit from direct leasing
Some of the individuals that can benefit from direct financing include captive leasing companies, independent lessors and brokers.
Equipment leasing broker act as go between the client and the equipment manufacturer. They take request from the prospective lessees and take them to the bank or financial service company that is more likely to finance the equipment. They finally negotiate the interest rate and payment schedule on the lessee’s behalf. They can also use direct funding. Individual lessors include companies that lease directly to the client. Mostly, they include banks, equipment lease specialists and diversified financial companies.
With direct financing, you can start marketing your business without any worries. Why? The financing option allows you to provide software and equipment to your clients without tying up any capital. Furthermore, direct financing can provide an income stream and allow you to meet your customer’s equipment requirement faster and more efficiently. When done correctly, direct financing generates additional income for the involved company, provides repayments to BSB Leasing agents and provides the needed equipment at the right time. Actually, most companies are now benefiting from the form of financing.