Most businesses in Kenya put their expansion plans on hold in 2017 due to uncertainty over the polls. But with the 2017 General Election behind us, and investor sentiment having improved across most sectors of the economy, expansion is once again a top priority for businesses.
Global risk analysis consultancy, Control Risks, expects Kenya’s economic growth to pick up in early 2018, a position that is shared by several other analysts. To capitalise on 2018’s growth prospects, many businesses will acquire assets such as motor vehicles that can support business growth. While some of these businesses will dip into their cash reserves to finance asset acquisition, most of them will take out asset finance facilities from banks and other financial institutions.
Taking a facility to acquire an asset such as a commercial motor vehicle has its advantages over a cash purchase. The most immediate advantage is that it helps businesses preserve their cash flow. Asset financing only requires an initial deposit and subsequent monthly instalments. This eases pressure off cash flows and enables businesses to utilise the asset immediately for growth.
This is a huge advantage for players in the SME sector, where a regrettable culture of late payment of invoices has left many SMEs facing perpetual cash flow challenges.
Despite this attractive proposition, why is it that a sizeable number of businesses who buy assets such as motor vehicles on loan end up being repossessed?
Incidence of motor vehicle repossessions were especially high in 2017, with commercial ones accounting for a significant number of vehicles repossessed. Media reports from as recently as October noted that vehicle auctioneers were lamenting about too many repossessed vehicles and not enough buyers. One media report noted that Kenya Auction, an online auction advertising platform, was placing at least 300 auctions on their website every month, up from 100 in the previous three years.
Though the sharp increase in repossessions of commercial motor vehicles was partly attributable to the political environment, lack of awareness about commercial vehicle loans also played a role.
It is never advisable for a business to buy a commercial vehicle on loan without first understanding the dynamics of owning a vehicle on such facility. Some businesses are obsessed with the purchase price and loan repayment costs and pay little attention to other equally important costs.
It is advisable to closely examine other costs such as fuel consumption, repairs, spare parts and insurance, which add to the total cost of acquiring, operating and maintaining the vehicle.
In any business, the total cost of acquiring, operating and maintaining an asset should be less than the revenues that you derive from utilising it. The difference between the revenue derived from the asset and the total cost of the asset should be sufficient to improve your business’s cash position, boost growth and sustain profitability.
In some businesses such as retail, it also important to assess whether the cost of hiring a vehicle is lower than the cost of ownership. If you hire a vehicle, you use it on a needs basis and do not need to cater for maintenance expenses. It is prudent to assess whether this approach suits your business needs before buying a vehicle that you will underutilise on loan.
If you choose to buy a commercial motor vehicle on loan, it is also important to bear in mind that you can negotiate a good rate with your bank, allowing you to reduce your monthly loan repayments and freeing up cash flow to grow your business. But for you to negotiate a good rate with your bank you need a solid financial track record, which can be built by cultivating a habit of channelling all your business transactions through your bank account and keeping accurate and timely business records. This point is especially important for SMEs, which have established a reputation of poor record keeping, according to a study by the African Development Bank (AfDB).
Ultimately, you have to understand your line of business well enough to know whether or not you should hire a vehicle, buy it in cash or acquire it on loan. If you choose to apply for a commercial vehicle loan to support your business growth in 2018, be sure to plan meticulously and factor in the considerations proposed in this article. Growth should not come at the expense of your company’s financial stability.