Year after year, many contractors, both large and small, list access to funding as one of their most formidable concerns facing the future of their businesses. In an environment where projects are few and far between and most of the capital equipment operators are exposed to cyclical industries such as construction and mining, they are often faced with an array of financial challenges, including credit availability or securing funds for expansion, as well as purchasing equipment to fulfil contracts.
Against such a background, small businesses find themselves being denied loans because of their limited operating history, low gross margins or when their industry doesn’t fall within the bank’s criteria.
In such circumstances, finding the right funder is important, and this is where innovative, specialist asset financing institutions such as ReichmansCapital come in. With over 40 years of asset and equipment finance expertise, coupled with a strong brand reputation in its target markets, the company takes a business approach to financing and a people approach to relationships.
Brett Kessel, Asset and Trade Finance at ReichmansCapital, says where banks find ways to say “no”, ReichmansCapital finds ways to say “yes” – relying on more than balance sheets when making decisions and prioritising speed, responsiveness and innovation when granting credit. The approach is informed by the company’s desire to see businesses expand, and allow firms to take part in projects that will increase their competitiveness. “We are always open to financing entrepreneurs because we are also entrepreneurs. Where banks often shy away, we take the opportunity,” says Kessel.
“Traditionally we have always financed assets that don’t lose their value,” explains Kessel. “We have always offered instalment credit finance to businesses in the manufacturing, engineering, plastics, printing and packaging. However, in the past 10 years we have expanded the portfolio to include earthmoving (construction and mining), logistics and transport sectors.”
Product range
When it comes to asset and equipment financing, ReichmansCapital offers three major products, namely Instalment Sales, Finance Leases and Rentals (off-balance sheet financing). Typical asset and equipment financing periods are between 36-48 months, but there is flexibility to go longer or shorter to suit customer needs when required. Driven by the need to maximise flexibility, ReichmansCapital finances both new and used equipment and customers can also be use paid up equipment as collateral. Key requirements include a legally-registered entity with trading experience of a minimum of two years, turnover of at least R2-million and minimum equity of R1-million.
According to Kessel, Financial Leases represent the majority of ReichmansCapital’s deals at this stage. He tells Capital Equipment News that as companies seek new, innovative and cost-effective ways to fulfil their asset financing needs, off-balance sheet financing has become the “buzzword” of the industry in the last couple of years.
“Many are moving away from the traditional instalment credit approach, which reflects the assets on company balance sheets,” says Kessel. “Financing assets off the balance sheet protects key debt-to-equity ratios, while freeing up cash flow for businesses to focus on their core activities. Consequently, the majority of our transactions are Finance Leases at the moment.”
So, what is a finance lease? A Finance Lease is a way of providing finance – effectively a leasing company (the lessor or owner) buys the asset for the user (usually called the hirer or lessee) and rents it to them for an agreed period. Basically this means that the lessee is in a broadly similar position as if they had bought the asset. The lessor charges a rent for hiring the asset to the lessee. The lessor retains ownership of the asset but the lessee gets exclusive use of the asset (providing it observes the terms of the lease).
The lessee will make rental payments that cover the original cost of the asset, during the initial, or primary, period of the lease. There is an obligation to pay all of these rentals, sometimes including a balloon payment at the end of the contract. Once these have all been paid, the lessor will have recovered its investment in the asset.
What happens at the end of the primary finance lease period depends on the actual agreement but there are possible options, including the lessee having to sell the asset to a third party, acting on behalf of the lessor; the asset can be returned to the lessor to be sold; and the customer can enter into a secondary lease period. When the asset is sold, the customer may be given a rebate of rentals which equates to the majority of the sale proceeds (less the costs of disposal) as agreed in the lease contract.
Flexibility matters
A key competitive edge of ReichmansCapital’s approach to financing is the flexibility. It is often difficult for capital equipment operators, especially small businesses, to get trusted lending partners that they can rely on to access funding with much more ease. Sometimes business demands become timely, such as when contractors must fulfil an unexpectedly large contract which requires more equipment to execute. ReichmansCapital offers a viable additional source of funding to that provided by traditional commercial banks, which enables businesses to maximise such growth opportunities and grow their assets.
For instance, when a junior miner of subcontractor has just been awarded new work which calls for new equipment, the key criteria for most traditional banks is to look at the operating history, gross margins and cash flows. This is a rigid approach which often results in contractors being denied credit to finance the assets they need. “We have a completely different approach. We sit down with the contractor and unpack their contract, evaluate the equipment they need and what it’s going to do for their business. While some traditional banks look at the company’s current financial position, our credit process takes into account, sustainable contracts, allowing us to support companies to execute available projects,” he says.
Kessel says the business climate is always characterised by both good and tough cycles, and it is in tough cycles where long-term relationships are crucial. ReichmansCapital prides itself in its people approach to relationships, and as a finance partner to its customers, the company always rides the tough cycles together with its clientele. For example, Kessel highlights one instance when a contractor working in the Mpumalanga mining area could not work for four months due to non-stop rains. “Through our flexible repayment structure, we could afford to adjust their instalments to allow them to ride the storm,” he says.
Reiterating the importance of flexibility, Kessel adds that often companies exposed to mining and construction sectors have a longer December downtime, while it is also time to pay out bonuses. To accommodate these scenarios, the company recently started doing half or skip repayments to ease cash flows for its customers during the festive period. “We have always looked at possible solutions to help customers in times of need,” says Kessel.
Large portfolio
Since venturing into capital equipment financing, ReichmansCapital has established a large portfolio across yellow metal assets, materials handling equipment (forklifts and cranes), as well as the transport sector. “We are predominantly active in three key sectors, namely, mining and construction, plant hire and the transport industry,” says Kessel.
A large portion of ReichmansCapital’s portfolio is yellow metal assets. The rest is spread across all other industries. “The yellow metal industry is the ‘sweet spot’ of our asset financing business. In this sector, we have assets ranging from the TLB to large mining machines,” concludes Kessel.
