Vendor Finance Allows Assets to be P&L and Cashflow Accretive From Year One. Here’s how.

Understanding the smartest way to use your capital and finance asset purchases is an important part of running a profitable business with healthy cash flow. For many companies, large assets and equipment are a standard part of operations and income production. Without these items, the business can’t operate and grow. And if these items are financed with a big capital expenditure (CAPEX) outlay, the business also sacrifices valuable cash reserves that could have been used to accelerate growth or provide a safety net. Solutions such as vendor finance allow businesses to purchase income-producing or cost-reducing assets without exhausting cash reserves, banking lines or working capital to deliver profit accretion from the first year of operation. This article outlines how businesses can finance the assets and equipment they need without sacrificing working capital.

What is profit and loss accretion?

Profit accretion is the gradual growth of earnings or the reduction of costs and losses through business activities. Ideally, a business wants to see profit grow sustainably and continually while costs and losses are minimised. Many factors play a role in profit accretion, including CAPEX, margins, and cash flow. Vendor finance is an effective way to access equipment while spreading the costs over the life of the finance term.

Obviously, the decision to acquire new equipment will be based on whether it delivers long term value through additional profit generation or cost reductions. However, the costs of acquiring equipment can have serious short-term impacts on the financial metrics of a business.

Address cash conversion and cash reserve challenges with vendor finance

One of the key challenges that businesses face in financing purchases is having the cash reserves and security available to secure a loan. According to the Australian Bureau of Statistics (ABS), 41 per cent of businesses have less than three months of cash reserves available to fund operations. For those businesses with a strong sales pipeline, a lack of working capital can make it difficult to capitalise on opportunities and access the goods and equipment needed for production. Vendor finance addresses cash reserve challenges by working with businesses to construct a financing arrangement that optimises the use of an asset for the business’s needs without sacrificing working capital. The example below illustrates the profit accretion abilities afforded through vendor finance.

Financing example: Great Southern Earthmovers.

Great Southern Earthmovers, an earthmoving business, needs an excavator valued at $300,000 for upcoming projects. If the business uses CAPEX to purchase the equipment, its cash reserves and profit generated from the equipment will be consumed. Instead, the company investigates financing the equipment. It will cost $10,000 per month to finance, with $12,000 in revenue generated from the machine each month, providing a net cash-positive outcome. At this rate, the excavator is paid off in 2.5 years, with the cash flow improving further over the remainder of the time that the equipment is in use. Further, Great Southern Earthmovers now owns an asset that can increase the size of their balance sheet and even boost cash flow through other opportunities, such as hiring the equipment to other businesses.

Secure the terms that are right for your business

Vendor finance offers businesses more favourable financing terms due to the financier and vendor's ability to arrange the asset's resale at the end of the finance term. On a longer finance term, such as five or seven years, the business not only secures a positive cash flow position on the equipment from year one, but the total cost of ownership for the asset is lower than a CAPEX purchase or bank loan. While financing for high-value assets is accounted for on the balance sheet, the net cash flow positive position enabled through vendor financing drives continual improvement of ratios throughout the finance term.

Equipment resale is seamless with vendor finance

When equipment is financed through traditional channels, the financier generally has little to no true knowledge of the equipment. They assess the security in the equipment as its auction value, which is traditionally a distressed sale and returns much lower values. In contrast, when an asset is sold at the end of the lease term through a vendor’s financier, the vendor can achieve a higher recoverable value for the asset. Depending on the financing arrangement, this allows for a larger residual position, and the customer’s repayments are lowered throughout the loan term, further improving the cash flow through income-producing and cost-reducing assets.

Financing income-producing and cost-reducing assets with Quadrent

Purchasing the equipment you need to operate and grow shouldn’t restrict your business’s working capital or strain your existing finance facilities. As vendor financiers can recover high value for equipment, they generally offer longer finance terms and require less collateral from other sources. Most business owners understand that their bank facility may be collateralised by all their business and personal assets. Vendor finance offers an alternative that reduces or reserves the use of those facilities.

With the right vendor financing arrangement, your business can achieve a positive net cash flow position on asset purchases in the first year. And with longer and more favourable finance terms than traditional channels, businesses can own the asset within the first two to three years of the finance term, further improving the revenue-generating abilities of the asset. Not only does this drive stronger cash flow, but it leaves existing finance facilities and cash reserves available for other uses.

Quadrent’s vendor finance solutions help businesses of all sizes access the best equipment without adding pressure to existing funding channels. And through Quadrent’s exclusive regional co-operation agreement with Societe Generale Equipment Finance (SGEF), we provide finance solutions for global equipment manufacturers and distributors. With the ability to structure more flexible funding arrangements compared to banks and the expertise of vendor financiers that fully understand their equipment, your asset financing needs are in safe hands with Quadrent.

Contact us today to learn more about how Quadrent’s vendor finance solutions can support your business in acquiring the best assets and equipment without restricting your cash flow.