u|Chief asked RentWorks CEO Kuben Rayan for the tricks of his company’s trade when it comes to helping businesses stay at the cutting edge of technology.
In this age of constant technological breakthroughs, company growth can usually be linked to having access to up-to-date equipment. Many people believe in buying and owning their equipment, but what are the benefits of financing and renting your ‘technology’, rather than paying cash for it?
Assets optimally utilised in the production of income will provide a myriad of benefits to companies. Some assets will introduce efficiencies that will result in cost savings while, alternately, other assets will allow companies to increase their production. The acquisition of a new asset could also introduce new product lines and/or allow companies a competitive edge in their industry. This will deliver one of the main goals of a business, which is to earn an income and, ultimately, derive a profit.
Most often these assets are acquired at a significant cost to the business. The challenge that most companies face is how best to acquire these assets. Paying cash for the acquisition of the asset may on face value be considered optimal. However, all assets depreciate over time, so there is a solid argument to conserve cash for working capital or for the company’s core business activity, rather than investing in a depreciating asset.
There is a solid argument to conserve cash for working capital or for the company’s core business activity, rather than investing in a depreciating asset.
An additional point to consider is that the benefit derived from utilising or putting an asset into production will be realised over time and, therefore, going the asset finance route will allow the company to align the cost to the benefit derived over time. In some instances, if the asset finance is properly structured, companies could actually service their commitment on the asset finance arrangement from the cash derived from the asset in production, thus creating a self-funding scenario for asset acquisition.
When paying cash, businesses will have to deal with the costs and obligations relating to the retirement of the assets, but these costs and risks can be avoided if the business opts for an asset finance offering such as a rental, where the asset is simply returned at the end of the rental to the Rental provider, with no further obligation.
Finally, asset financing allows businesses to replace income-producing assets regularly as these assets can be procured and paid for over time, reducing the cash flow burden that a cash purchase places on the business.
What do businesses have to watch out for when it comes to asset finance?
When considering asset finance, businesses need to consider the following: –
- What are the business’s drivers in terms of the asset acquisition?
- Does the business require ownership of the asset?
- Does the business simply need to utilise the asset for a period of time, without ownership?
- What tenure is required?
- What is the useful life of the asset in relation to the business’ planned need?
- The financials aspects of the deal on offer.
- What are the terms being offered?
- How cost-effective is the finance offering?
- Is a deposit required?
- Does the deal structure align with the business’ drivers?
- The legal aspects of the asset finance offering.
- How transparent and fair are the terms and conditions?
- What are the obligations at the end of the finance arrangement?
- The accounting implications of asset finance.
- The impact to the balance sheet and income statement.
- The impact to key ratios such as Return on Asset (ROA), Return on Equity (ROE).
Companies could actually service their commitment on the asset finance arrangement from the cash derived from the asset in production, thus creating a self-funding scenario for asset acquisition.
What is important for people to be aware of in terms of the insurance of these assets?
Whether your assets are financed or paid for with cash, businesses need to be aware that these assets should be comprehensively insured. If not then, in the event of a loss or damage to the assets, the business will have to bear the cost of repair or replacement. Depending on the value of the asset to be replaced, this could result in a significant unbudgeted expenditure. Additional risks include downtime in production and the knock-on effect of unhappy clients and a loss in revenue, should the lost or damaged asset be business critical.
An additional area to consider is the terms and conditions of cover, and businesses should ensure that they are au fair with the type of cover as well any limitations or specific requirements and obligations on the business to ensure cover is maintained.
Businesses are advised to engage with their FAIS accredited insurer or insurance brokers, who will be well placed to provide appropriate advice in this regard.
RentWorks was the first company in South Africa to offer genuine residual-based rental solutions. How did this come about and what are the benefits of this solution?
The founding shareholders of RentWorks had established this successful business model in Australia and were looking to expand into new markets, and South Africa was identified as a country with great potential. In the late 1990s, RentWorks pioneered genuine residual-based rental solutions, initially for the acquisition of ICT assets in South Africa.
Over the last 19 years, RentWorks has developed to become one of the largest funders of IT assets in South Africa, and we have diversified our funding capability beyond IT to include other asset classes, including mining and construction equipment, solar, plant and machinery etc.
What are the benefits of RentWorks’ rental solution?
- Optimising your cash flow by purchasing the equipment you need today, but spreading the payment across the asset’s useful life.
- Mitigating against the costs and risks associated with obsolete assets. In the case of a Rental arrangement, at the end of the initial rental term companies can simply return the assets that they no longer require and then upgrade to the latest assets and technology. This is the most effective funding option available on assets that require regular replacement.
- Maximise your purchasing power by utilising asset finance to procure the asset now, instead of either reducing the asset specification or delaying the rollout of your asset acquisition project due to cash constraints or waiting on the next budget cycle.
- Funding the asset using an IAS17 (accounting standard regulating the classification of leases) compliant Rental arrangement will allow the company to fund the acquisition via an off balance sheet structure, which will have a positive effect on a key efficiency ratio, ROA (return on asset).
- Negating the requirement for a deposit, as is the case in the traditional instalment sale agreement.
- For suppliers, one of the benefits is negating the requirement for a guaranteed buyback that they would normally be expected to provide to the traditional banks in order to assist clients in securing credit. The RentWorks Residual Investment assists in mitigating this requirement and releases this contingent liability imposed on the supplier.
Benefits to renting? “Maximise your purchasing power by utilising asset finance to procure the asset now, instead of either reducing the asset specification or delaying the rollout of your asset acquisition project.”
You take great pride in your “unrivalled ability to resell assets on return”. Why is this important for you?
We have warehouses in the major centres around South Africa and, when assets are returned at the end of their rental term, we refurbish the asset and are able to either re-rent these assets to SME’s, or they are sold via a network of resellers that we have established over the past 19 years. We also provide short-term rental solutions for corporates who may require assets for specific short-term projects, training, or a candidate programme. All assets sold via our warehouses include a 3-month warranty to provide clients with the comfort that they have after sales support.