Nose for Business

According to Richard Korda of Zenith Finance, there’s a saying in the industry that you could lease air to BHP, meaning if you’ve got the right client, and they are financially strong, you can lease practically anything to them.

In short, there’s still money around and businesses that are expanding have plenty of options to choose from, not only in terms of the finance deals themselves but also in terms of what can be financed.

While many businesses arrive at a decision to expand as a result of external factors such as a cus­tomer expanding and needing more equipment or an opportunity becoming available, Kerri Thompson, Managing Director, Commercial Equipment Finance, GE Commercial Finance suggests a more cautious approach.

“There are always opportunities out there and always something you can do but you need to make sure your house is in order before taking these on.”

She adds “when you’re talking about financing an acquisition or core growth, you need to be confi­dent that the operating rhythms that are in place in the business and its leadership are ready to take on a major expansion.

This involves being able to manage not just the expansion but also any challenges that will inevitably arise.

Only if you have confidence that these are robust enough should you be on the look out for opportunities to take advantage of.”

Richard Korda agrees, saying that doing due diligence is vital.

“It’s important to investigate the acquisition carefully and to do your calculations and get expert advice if you’re not expert in that area,” he says.

“Many businesses don’t approach the task carefully enough and once you’re half way into a purchase you’re in too deep to back out even if you find you have unexpected costs you haven’t budgeted for.”

When businesses are expanding, often it’s machinery and equipment that needs to be financed.

Indiran Padayachee, Retcorp Forklifts, a specialist materials handling sup­plier to leading logistics compa­nies specialising in airfreight and 3PL (third party logistics) aims for a 50-50 mix of finance and owner­ship of its fleet of over 1,000 fork­lifts.

Financing half the fleet allows the company to preserve capital reserves but Indiran Padayachee is pragmatic about finance costs.

“We estimate that one third of our payments on a 60 month finance contract is interest and even with the tax concessions, we’d be better off taking the depre­ciation on owning the Equipment, he explains.

There are a range of finance options available for equipment acquisition as Kerri Thompson explains, “there are two buckets of money — leases and loans and within each are various options.”

“For example, in an operating lease the asset is owned by financier and lease or rent payments are made.”

“On the other hand, where a finance lease is used the business retains ownership in the asset and it makes payments on it so it’s more like a loan than a lease.”

In addition to equipment and machinery, other business assets can be financed. Kerri Thompson says it’s possible to finance assets you already own.

“A trucking com­pany looking to acquire a business may finance some of the equipment it already owns and use the funds released to acquire the goodwill in the other company,” she says.

“Other assets that can be financed include cashflow, receivables, and inventory — in short pretty much anything that is an asset on the business’ balance sheet.”

Richard Korda maintains that if client is strong enough and needs a product for the business — his com­pany can generally finance it.

“When making a choice of financing vehicles, Korda explains that what is right for one business may not be right for another,” he says.

“Finance options vary so far as the financial structure of the loan as well as tax and GST implications, and ownership so each situation should be assessed individually for suitability to that business.”

For many businesses, expansion requires new premises so the busi­ness will look to either lease or purchase these.

While leasing involves a shorter term commit­ment it involves less risk as the business can walk away from the premises if they are no longer suit­able to its needs at the end of the lease period.

Purchasing land or warehouses is a more permanent arrangement where the implica­tions and risks of owning the land become a consideration when pur­chasing — this is in addition to the location and suitability of the premises to the business.

When Rentcorp Forklifts pur­chased a large tract of land recent­ly with a view to future expansion, one of the considerations in the purchase apart from the suitability of its location was the potential for selling the property later on.

“Buying property is all about getting value for your money and you need choose a location which is sound now and which has good future potential,” argues Kerri Thompson.

“Ask yourself if people will want to have businesses in this area in future? When develop­ing land, if you develop it to suit a very specific use, you limit the potential buyers for the land in the future.”

“It is better to ensure the property is developed with a view to being suitable for multiple uses — make it efficient for your busi­ness but generic in overall poten­tial so it can be resold.”

The finance options for commer­cial and industrial land differ from home finance.

As Carlo Ruscitti, founder of Melbourne Business and Investment Corporation (MBIC) explains, “where you can borrow up to 90 per cent or more with mortgage insurance on a house, a business will gener­ally be looking at 65-70 per cent loan to value ratio.”

In addition to the 30-35 per cent capital cost that the business must provide to complete the purchase, you should also factor in statutory, legal and other charges, including hefty stamp duty costs.

Kerri Thompson explains that special circumstances may see business property loans funding up to 85 per cent of the value of the proper­ty where the location is good with good future potential and the busi­ness is seen as a good risk.

If there is equity available in other proper­ty owned by the business, this can be used to secure a larger than typical loan on the new purchase.

With increasing interest rates, new financing options are appear­ing.

Kerri Thompson explains that in an attempt to keep payments affordable it is possible to get a 10 year loan which is amortized over 25 years.

With this type of loan, the payments are calculated as if it were a 25 year loan but with an actual term of 10 years.

At the end of the term, the business refi­nances or pays out the loan bal­ance.

Finance and property markets are in a state of flux.

Carlo Ruscitti explains that Melbourne’s expand­ing population and buoyant resi­dential property market is consum­ing industrial land and there is a premium on what suitable land there is available.

In Sydney while there is a lot of unsold property in some areas, other locations are very competitive.

In the lending market, Kerri Thompson says funding is still available but it is harder to get and more expensive than in the past. “In addition, there is more analysis on debt serviceability,” she explains.

“Acquisitions and merg­ers are resulting in fewer players and less competition in lending.”

Indiran Padayachee says her company has been watching the finance market closely.

“Recent mergers and takeovers have meant that instead of having two suppli­ers competing for our business we now have only one,” he observes.

“Not only is there less competition, but where we might have enjoyed a $3M credit limit from each of two lenders in the past, when they merge we don’t get $6M credit – we $3M in total so we have less money available to us.”

Making the decision about what financial package is best suited for a business is not one to be taken lightly. Rentcorp Forklifts utilizes the services of Zenith Finance to arrange its loans.”

As Indiran Padayachee explains, “we have used Zenith Finance for the last eleven years. We’re experts in materials handling and they’re experts in finance so they bring this expertise to our business.”

“It’s one less thing for us to worry about — we tell them what the deal is and they find the best finance vehicle for us.”

In Kerri Thompson’s experience, when talking to a business about finance options she often is able to suggest different structures to the business, “we have that expertise to offer a range of options,” she explains.

“For example, we might suggest an option which gives a business a buffer in its debt serv­ice capabilities so the business retains some of its cash reserves.”

If your business is considering financing its expansion, take Richard Korda’s advice and do due diligence on all aspects of your purchases and loans.

Read and understand the contracts and keep in mind the sign on the office wall at Rentcorp Forklifts:

“The common law of business balance prohibits paying a little and getting a lot; it can’t be done,” he says.

“If the deal sounds too good to be true, it prob­ably is.

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