I have run a manufacturing entity for the last ten years. It has been doing well so far and we are ready to scale up production to meet demand. To do this we have to invest in equipment that runs on newer technology. The business cannot afford to finance this purchase through debt as this would affect our liquidity negatively. What other options can I resort to? --Patel
Dear Mr Patel,
Congratulations on your growth. Businesses that reach this stage have one main concern and that is, how to finance their growth.
As you have rightfully mentioned, if your business leans too much on debt this may affect your liquidity and working capital.
Most of the revenue earned will go towards repayment of the loan thus increasing your chances of defaulting on routine payments.
One would have to be very patient to sit and wait out the loan repayment period which can be many years. It certainly is not conducive to the business.
How then can you finance this growth and what legal issues would arise with the method you choose? One way is through equipment leasing.
Are there organisations that offer equipment leasing for the kind of machinery you are seeking out? You have not mentioned the nature of the industry that your business is in.
I am aware there are companies that give equipment leasing for cars, laptops, heavy-duty printers, agricultural, factory, construction, and mining machinery among others.
How equipment leasing works is very simple. The company that offers equipment retains ownership, however, it allows you to use the equipment fully in exchange for periodic payments, for example monthly.
This means that you simply rent out the equipment without having to incur heavy costs associated with purchasing the same.
In most cases, the lease repayments would be financed from the extra revenue generated from the business growth.
Depending on the type of contract you enter into, the lessor may be responsible for maintaining the equipment.
This is especially attractive as you will save on equipment maintenance costs. Similarly, depending on the contract, you may be given the option of buying the equipment after the leasing period ends.
Equipment leasing is attractive where you may not have the high capital expenditure to buy your own equipment but still require the same for expansion as in your case.
It is also suitable for fast-changing technological equipment like computer equipment. The chances of being stuck with obsolete equipment are greatly minimised.
Once the lease period comes to an end you can either purchase newer versions of the same equipment or get into an arrangement with newer equipment.
You may also opt for equipment leasing for projects where the equipment is only needed during the duration of the contract.
Your main obligation as a lessee is to make periodic payments and report any malfunctions to the lessor and avoid negligent handling of the equipment.
Ms Mputhia is the founder of C Mputhia Advocates | [email protected]