7 Examples of SMME’s Using Asset Based Finance To Grow

What is a small, medium, and micro enterprise (SMME)?

Asset-based finance has become a lifeline for small, medium, and micro enterprises (SMMEs) around the world. SMMEs are businesses that typically have fewer than 250 employees and generate a modest annual turnover. They play a crucial role in driving economic growth, job creation, and innovation in many countries.

However, access to traditional financing options, such as bank loans, can be challenging for SMMEs due to their limited credit history, lack of collateral, and perceived higher risk. This is where asset-based finance comes in as a game-changer.

Asset based finance, also known as equipment leasing, is a financial arrangement in which a company or individual uses a piece of equipment in exchange for regular payments. The equipment serves as collateral for the leasing contract.

In a South African context, equipment finance is a common method for businesses, in various sectors like agriculture, mining, manufacturing, or construction, to gain access to the latest machinery and equipment without having to make a substantial upfront investment. Here’s a detailed breakdown of how this process works:

1. Lease Agreement: The business (lessee) enters into a lease agreement with a financial institution or leasing company (lessor). The lessor purchases the equipment required by the lessee and then rents it out to them for a specified period.
2. Lease Payments: The lessee makes regular payments for the use of the equipment. These payments are typically structured to be affordable and spread out over the lifetime of the equipment.
3. Ownership and End of Lease: At the end of the lease term, depending on the lease agreement’s type, the lessee might have the option to purchase the equipment at a reduced price, return the equipment, or renew the lease.

In South Africa, there are different types of equipment finance options, such as finance leases, operating leases, and instalment sale agreements, each with its own tax and accounting implications. The chosen arrangement often depends on the specific business needs and financial situation of the lessee.

It’s also important to note that South African financial regulations, such as the National Credit Act (NCA) and Financial Sector Regulation Act (FSRA), govern such financial agreements. These regulations aim to protect consumers and ensure transparency in the financial sector.

By using asset based finance, businesses can effectively manage their cash flow, stay up-to-date with the latest technology, and avoid the depreciation risks associated with owning equipment. However, they should also consider potential risks such as the total cost of leasing over time and the condition of the equipment at the end of the lease.

Case study 1: SMME using asset based finance to purchase new equipment

One common challenge faced by SMMEs is the need to upgrade or replace outdated equipment to remain competitive. However, the cost of purchasing new machinery or technology can be prohibitive, especially for businesses with limited cash flow or access to traditional financing.

This is where asset based finance can be a game-changer. Take the example of a small manufacturing company that needed to invest in state-of-the-art equipment to expand its production capabilities. By leveraging equipment finance, the company was able to secure the necessary funds to purchase the machinery it needed without depleting its cash reserves. As a result, the company was able to increase its production capacity, meet growing customer demand, and ultimately, boost its revenue and profits.

Case study 2: SMME using asset based finance to expand their inventory

For retail businesses, maintaining a well-stocked inventory is crucial to meeting customer demand and staying competitive. However, financing the purchase and storage of inventory can strain a business’s cash flow, especially during seasonal peaks or when scaling up operations.

Asset-based finance, specifically inventory financing, can provide a viable solution for SMMEs in this predicament. Consider the case of a small online retailer that experienced rapid growth and needed to expand its inventory to keep up with customer demand. By leveraging asset based financing, the company secured the funds needed to purchase additional stock, without tying up its working capital or sacrificing its cash flow. This allowed the business to seize new sales opportunities, improve customer satisfaction, and ultimately, drive its growth trajectory.

Case study 3: SMME using asset based finance to improve cash flow

Maintaining a healthy cash flow is critical for the survival and growth of any business. However, SMMEs often face cash flow challenges due to delayed customer payments, seasonal fluctuations, or unexpected expenses. These cash flow gaps can hinder growth opportunities and even jeopardize the viability of a business.

Asset-based finance, such as accounts receivable financing, can be a lifeline for SMMEs struggling with cash flow issues. Take the example of a small consulting firm that faced delayed payments from clients, causing strain on its cash flow. By leveraging accounts receivable financing, the company was able to access immediate funds by selling its outstanding invoices to a finance provider at a discount. This injection of cash allowed the firm to bridge the cash flow gap, meet its financial obligations, and continue pursuing growth opportunities without interruption.

Case study 4: SMME using asset based finance to fund a marketing campaign

Marketing plays a crucial role in driving awareness, attracting new customers, and expanding market reach. However, launching an effective marketing campaign can be costly, especially for SMMEs with limited marketing budgets.

Asset-based finance can provide a creative solution for SMMEs looking to fund their marketing efforts. Consider the case of a small software startup that wanted to launch a digital marketing campaign to increase brand visibility and generate leads. By leveraging its intellectual property as collateral, the company secured the necessary funds to execute its marketing strategy, including website development, content creation, and online advertising. This investment in marketing paid off, as the company saw a significant increase in website traffic, lead generation, and ultimately, revenue growth.

Case study 5: SMME using asset based finance to hire additional staff

As SMMEs grow, they often need to expand their team to meet increasing demands and ensure smooth operations. However, hiring and onboarding new employees can be a costly endeavor, particularly for businesses with limited cash reserves.

Asset-based finance can offer a practical solution for SMMEs in need of additional staffing. For example, a small IT services company that experienced a surge in client projects and needed to hire more developers. By leveraging its existing contracts and accounts receivable, the company secured the necessary funds to recruit and train new staff members. This enabled the business to meet client expectations, deliver projects on time, and ultimately, fuel its growth through increased customer satisfaction and repeat business.

Case study 6: SMME using asset based finance to enter new markets

Expanding into new markets can be a lucrative growth strategy for SMMEs looking to diversify their customer base and tap into new revenue streams. However, entering new markets often requires significant upfront investment and carries inherent risks.

Asset-based finance can provide the capital needed to support SMMEs in their market expansion endeavors. Consider the example of a small food manufacturing company that wanted to enter international markets but lacked the necessary funds to establish distribution channels and comply with regulatory requirements. By leveraging asset-based finance, specifically trade finance, the company secured the funds needed to navigate export logistics, comply with international standards, and establish relationships with overseas distributors. This strategic move enabled the business to successfully enter new markets, expand its customer base, and achieve sustainable growth.

Case study 7: SMME using asset based finance for business acquisition

Acquiring another business can be a powerful growth strategy for SMMEs looking to expand their market share, diversify their product offerings, or enter new geographic regions. However, funding a business acquisition can be a complex and capital-intensive process.

Asset-based finance, such as acquisition financing, can provide the necessary capital to support SMMEs in their acquisition endeavors. For instance, a small technology company that identified a strategic acquisition target to enhance its product portfolio and accelerate growth. By leveraging its existing assets, including intellectual property and customer contracts, the company secured the funds needed to complete the acquisition. This strategic move allowed the business to quickly integrate the acquired company’s assets, capabilities, and customer base, leading to accelerated growth and increased market share.

The power of asset based finance for SMME growth

Asset-based finance has emerged as a game-changing strategy for SMMEs looking to fuel their growth and overcome financial constraints. By leveraging their existing assets, SMMEs can access the capital they need to invest in new equipment, expand their inventory, improve cash flow, fund marketing campaigns, hire additional staff, enter new markets, and even acquire other businesses.

The seven examples we’ve explored in this article demonstrate the immense potential of asset-based finance in driving SMME growth and success. Whether you’re a manufacturing company, a retail business, a consulting firm, a technology startup, or any other type of SMME, asset-based finance offers a flexible and innovative solution to fund your growth plans.

So, if you’re an SMME owner looking for creative ways to fund your growth and take your business to new heights, consider exploring the possibilities of asset-based finance. Unlock the latent value of your assets and turn them into engines of success. The opportunities are waiting – seize them and propel your SMME towards a brighter future.