Unlocking capital is key to SME success new research shows

By Geoff Scofield, Westlawn Finance MD & CEO
25 November 2014

The September 2014 Alleasing Equipment Demand Index Report reveals that 66% of Australian small to medium enterprises (SMEs) are being held back by outdated technology and unproductive assets. The report suggests that with the negative impact these old technologies and unproductive assets have on Australian businesses, a significant amount of the corporate funds currently tied up in such assets could instead be liquidated and put to more productive uses.

The report found Australian businesses with annual revenues of between $1 million and $100 million maintain a relatively even split between owning and leasing assets (excluding property).

Assets leased by Australian businesses have an estimated value of $91.8 billion (equivalent to 5.9% of Australia’s annual GDP), while the value of owned assets are estimated at $85 billion (5.5% of GDP).[1]

The $85 billion locked up in owned assets reveals the extent of funds that could potentially be used for more productive purposes. While it’s inconceivable that the total $85 billion could ever be completely unlocked, there is, nevertheless, a significant pool of funds that could be used more productively by Australian businesses.

The report added that unlocking this capital could have a positive impact on the Australian economy:

“Unlocking of capital could make a noticeable and quantifiable difference in an economy where small businesses regularly struggle to access other methods of finance, and where cash flow continues to be an issue.”

More productive use of capital

Tying up capital by owning (often outdated) assets outright means many businesses struggle to find enough cash to invest in growing the business. For example, by hiring and retaining the right employees, conducting product research and development and marketing.

“Utilising asset finance solutions rather than upfront capital expenditure, businesses can both address the significant issues of cash flow and capital management, whilst also delivering on the growth aspirations.”

The Equipment Demand Index Report states that “asset finance can have a multiplier impact on the economy” and that “investment in new technologies will support a greater focus on research and development, as well as improvements in production and operational processes”.

SMEs utilising leasing and rental arrangements

While the ratio between owned and leased assets is currently split fairly evenly, evidence suggests that businesses are beginning to lean more towards leasing.

According to the report, 28% of SMEs intend growing their asset base by 8% over the next 3 months. This equates to almost $6.5 billion of assets. And of those SMEs intending to grow their asset base, just under a third plan to purchase assets outright (or use secured finance from the banks).

This may in part be due to the fact that 28% of SMEs say that their decision is driven by a lack of access to secured financing.

Around half of SMEs planning to expand their asset base intend to fund new purchases through asset finance such as leasing and rental arrangements. 

“Utilising asset finance solutions rather than upfront capital expenditure, businesses can both address the significant issues of cash flow and capital management, whilst also delivering on the growth aspirations.”

Benefits of business finance

Asset finance (or equipment finance) includes various financing options such as leasing, commercial hire purchase, chattel mortgages and rentals. While each option has its own tax effects and costs, the benefits of utilising equipment finance to acquire income-producing, tax-depreciating assets include:

    • Keeps technology and equipment up to date
    • Capital is available to spend in other areas such as staffing, stock, and marketing
    • Depending on finance type, assets are off-balance sheet for accounting purposes
    • GST claimable (either as one lump sum or incrementally over finance period, depending on finance type), and
    • Possible depreciation benefits.

Businesses turning to brokers

With SMEs increasingly turning to equipment finance, more are also seeking the expertise of brokers to source that finance. Market research firm, East & Partners, in its annual Asset & Equipment Finance Report stated that:

“SME businesses turning over $5 – 20 million are the heaviest uses of brokers with 53.2% using the channel, an increase from 49.3% last year.”

In its research, East & Partners found the main factors driving the demand for finance brokers are threefold:

“The main benefit customers see in broker engagement is to access better pricing, cited by an increased 52% of businesses, 41% say that using a broker ‘saves time shopping around’ while another 26% say it gives them access to a broader range of financing solutions.”

At Westlawn, our specialist business finance brokers can access major commercial lenders as well as Westlawn’s own finance options to help your business find the right equipment finance to suit your needs and budget. To find out how we can help you, call us on 1300 WESTLAWN (1300 937 852) or enquire at your nearest Westlawn branch.

About the report

The Alleasing Equipment Demand Index is a quarterly index which examines the current asset inventory of Australian businesses, as well as expectations for future investment. The inaugural index was run during July and August 2014, with 1,253 Australian businesses that turn over $1 million to $100 million annually surveyed. The index is executed by East & Partners on behalf of Alleasing.

Copyright © 2014

[1] Based on APRA data and research from East & Partners Australian Asset & Equipment Finance Markets Program.