A strengthening case for asset finance

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Before the global Covid-19 pandemic, the local mining, construction and agricultural sectors were already grappling with various challenges. Weak global demand triggered a commodities slump, while low local economic growth, policy, land and regulatory uncertainty, and labour disruptions impacted domestic operations. The pandemic’s economic impact has magnified these challenges: it affected exports due to ports closures and government-mandated restrictions on operations. Domestic demand for resources also fell as Eskom reduced the amount of coal it was taking from its suppliers. These factors created havoc with companies’ and sub-contractors’ cashflows.

While the market has experienced a slow return to normalisation since July, no one is at full production yet. In fact, a number of businesses across these industries opened and then, due to positive Covid-19 cases found among their workers, had to close again. Additionally, new safety measures had to be put in place which also led to less productivity time and in some cases, three shifts a day were brought down to two, which has had ripple effects through the cycle. As such, South African businesses continue to cut costs to ensure their sustainability.

Some have resorted to cost containment measures; mine operators, for example, have to balance sustainability with the cost of production. Miners must sustain investments into exploration and growth initiatives to ensure future sustainability, as well as projects that boost current operational efficiency and streamline production capabilities, while maintaining cash on hand to exploit potential market opportunities. In the face of significant capital constraints and downward pressure on revenues, these investments can add to the sector’s financial challenges and further impact already strained cash flow.

From a construction point of view, we have also seen many contracts being put on hold, as well as project cancellations — some manufacturing plants that were in the pipeline have been halted or cancelled. And while agriculture was declared a critical industry and was exempt from the harshest lockdown regulations, food production value chains were not at optimal levels, causing bottlenecks and blockages that led to product losses.

A lack of liquidity in these sectors can spark a chain reaction in the working capital cycle, which, considering the current market, is likely to take a long time to normalise, but maintaining liquidity is crucial, now more than ever. Businesses in this position should consider all available options from financiers, such as repayment moratoriums on interest and capital, and Covid-19 loan funding at prime with repayments over 5.5 to six years. Additional options include trade finance solutions, which can cover payments to qualifying suppliers, or a borrowing-based facility that provides funding on an ongoing basis against the value of the company’s debtors.

Asset financing via leasing and rental finance can also offer viable options to attract funding and unlock working capital, especially in circumstances where businesses do not have access to bank funding or experience delays in client settlements. In fact, the ownership benefit has emerged as a powerful incentive, as more businesses realise the investment value of retaining ownership of their machinery at the end of a lease agreement, with the support of asset financing. Asset financing can also unlock value by freeing up working capital for investment into other critical areas of the business, while boosting cash flow and liquidity to help sustain the business through uncertainty.

In addition, this flexible funding model allows these businesses to expand their productive asset base operations ramp up, or in response to market opportunities as local and global economic conditions improve. In fact, in these instances, accessing asset finance on a lease or rental basis can help miners fund new and used assets on repayment plans that match the business’s current cashflow, while spreading the cost of productive assets in line with the revenue they generate.

Partnering with the appropriate asset finance partner can unlock additional benefits. For instance, some financiers manage the administrative and logistical complexities of importing assets or offer the option to upgrade equipment during the leasing period, and some are offering payment holidays and fixed interest rates on productive assets. Additionally, some also offer reduced payments during known slower periods such as December and January.

Based on these benefits, asset finance is a rising trend across capital-intensive industries and has gained significant traction in these sectors over the last two years. This trend is likely to continue, particularly as it presents a viable alternative to renting machinery to complete projects, which is an expensive exercise, especially given market and project volatility.

Ultimately, in the right circumstances, appropriately structured asset financing can help businesses minimise their risks and maximise their cashflow at a time when the need for both has never been greater.

Lourens Campher is Head of Asset Finance, Investec For Business

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