Tough operating conditions continue in the mining sector, largely due to weak demand and falling commodity prices. Cash-flow is under constant pressure and mining is an expensive business.
Historically, funding options in acquiring equipment were simple and direct with capital expenditure budgets the order of the day. However, as production and labour costs have increased, paralleled by a slow down in the economy, mining and construction companies have been forced to reassess their spending policies. “Capex budgets have largely been cut to the bone,” says Christo van Wyk, Business Manager of the yellow metals division at RentWorks, South Africa’s largest independent asset rental company. “This leaves decision-makers scrambling to explore alternative funding options to acquire needed capital equipment.”
“There are a number of innovative funding options to assist with procurement, says Kuben Rayan, Group Sales Director at RentWorks. Traditionally, companies paid cash for equipment, or funded the purchase through a bank. As with vehicle finance, the bank pays for the equipment upfront, normally with a 10-30% deposit requirement. The payments comprise both the capital amount as well as interest and ownership is handed over at receipt of the final instalment. This sort of transaction is defined as a finance lease in terms of International Audit Standard 17 (IAS 17) and is viewed as capital expenditure (capex), reflecting as a liability on the balance sheet.
Conversely, an operating lease is an agreement where the lessor invests the upfront capital for the equipment, allowing for more flexibility in how the client lease is structured. “This is our key differentiator,” says Rayan. “An operating lease can be structured to accommodate and satisfy unique customer needs around cashflow, available operational budget (opex), and term. It also allows for the option to return the equipment after the duration of the lease,” he says. RentWorks has warehousing and alliance partnerships which assist in disposing of used equipment and to recoup its investment. The residual value – RentWorks’ investment – is not included in the cost of the lease and therefore is not borne by the client, reducing the cost of use of the equipment versus its outright purchase.
“In addition to freeing up cash and no upfront deposit requirement in most instances, an operating lease is an opex expense and as a result does not impact the balance sheet ,” says Rayan. “Our offering is a truly off-balance sheet solution in terms of IAS 17 improving the debt/equity, return on asset. This is only possible because of our investment into the transaction and our structure adhering to the accounting (IFRS)requirements.”
“We make it our business to understand the business drivers of our customers,” says van Wyk. “The customer has various options at the end of the lease period, by either returning the equipment to RentWorks, extending the lease period or acquiring the equipment from RentWorks at fair market value,” he says. “Our model caters for lease solutions relevant in the current tough economic conditions and fills several gaps left by traditional finance offerings.”
“Our ability to structure flexible operating leases as an alternative funding option to acquire capital equipment is more relevant than ever and the traditional funding methods is no longer the only option to be considered by companies looking to survive or grow during tough times,” says Rayan. “RentWorks has a variety of funding lines to cater for different customer needs, which include traditional funding lines with some of the banks, as well as a fund outside of banking lines.”