The Benefit of Diversifying Funding Lines With a Leasing Company
Business funding options have grown in recent decades, expanding from debt capital through banks and private sources to a range of alternative lenders. While some traditional funding lines are effective in providing businesses with the capital they need to trade and grow, there are also limitations and, sometimes, a disconnect between the funding and its purpose. In contrast, using a leasing company to fund and access assets and equipment diversifies funding lines while offering a range of other strategic, financial and operational benefits. This article outlines the benefit of diversifying funding lines with a leasing company.
What it means to diversify funding lines
Diversifying funding lines refers to the strategy of obtaining financing from multiple sources or funding channels rather than relying on a single avenue. In the context of businesses or financial institutions, this approach aims to reduce dependence on a specific funding source and spread financial risk. By accessing funds from various lenders, investors, or financial instruments, organisations can enhance their financial resilience and stability.
Diversification of funding lines may involve securing loans from different banks, issuing various types of bonds, seeking equity investments from multiple shareholders, utilising different credit facilities, exploring alternative financing methods like venture capital or crowdfunding, or financing assets and equipment through a leasing company. This practice helps mitigate the potential negative impacts of a funding crisis in any particular source and provides greater flexibility and adaptability in managing financial needs.
The key benefits of diversifying funding lines
Diversifying funding lines offers several key benefits to businesses.
First and most importantly, it reduces reliance on a single funding source, mitigating the risk of instability if that source becomes unavailable or expensive. Previously many entities have been reliant on a single institutional bank for all debt funding but in the current uncertain business environment a diversification to at least a syndication of banks is prudent.
By spreading financial risk, organisations enhance their financial stability and resilience, safeguarding their operations during economic uncertainties. Funding diversification also opens up access to a wider pool of funding options, allowing companies to secure more favourable terms and conditions. Different funding channels may offer varying interest rates, repayment periods, and covenants, providing flexibility in managing debt obligations.
Companies can also improve their reputation and creditworthiness, as lenders and investors view diversified funding portfolios as a sign of prudent financial management. This, in turn, can lead to increased investor confidence and opportunities for raising additional capital in the future.
How to use leasing as an additional funding line
Using leasing as an additional funding line involves incorporating leased assets into the company's financial strategy to meet operational needs and manage cash flow. This can be done by leasing assets and making monthly repayments instead of needing large upfront payments or capital expenditure. The structure for leasing the assets will depend on whether a company already owns assets that it would like to convert to a lease agreement or if it will fund the assets through the leasing company directly (lessor).
Generally, a company can transition to using leasing as an additional funding line in one of three ways:
- Buyback: The company gets money for its old devices, both for devices currently in use to be decommissioned and surplus devices in storage. This provides a cash injection that can be used to build up working capital reserves or invest in other growth initiatives.
- Sale and leaseback: For companies that currently own their devices and don’t need to replace them, the devices can be sold to the lessor and leased back. This allows the company to use the technology for its useful life while spreading the cost of ownership across the asset’s useful life.
- New devices: Companies can also start a lease agreement with a lessor to fund new devices. This is suitable for situations where a company is finishing a lease with another leasing provider or if they previously owned their devices and made other arrangements to decommission them.
Using one or a combination of the above methods to add leasing to a company’s capital structure allows for more effective cash flow management by making consistent monthly repayments, with interest rates fixed across the lease term.
Diversify your funding lines with Quadrent
Rising interest rates and the growing cost of inputs is making it especially important for companies to diversify their funding lines and gain certainty over as many of their expenses as possible. Leasing offers companies the ability to access the latest equipment and technology without sacrificing working capital. Further, with the lessor bearing the risk of asset depreciation and obsolescence, companies know they are using assets at the peak of their useful life, and have a trusted partner to securely decommission, recycle or e-waste the assets.
Quadrent helps financial decision-makers lower their financial risk and diversify their funding lines while freeing up cash flow and providing certainty of leasing costs for the life of the term. With a team that has in-depth leasing knowledge and specialised accounting backgrounds, we’ll help your business weather tough economic conditions, get the most value out of your assets and address growing ESG requirements and reporting expectations.
Get the assets you need without sacrificing working capital with Quadrent. Click here for more information.