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Entrepreneurs: how to finance a business asset without draining your cash flow?

Need a new asset to keep your business running? Is your business model based on hardware leasing (HaaS model)?

Choosing between all the financing options isn't easy: buying outright, taking out a loan, or opting for a finance lease or operating lease. With so many possibilities, it quickly becomes a headache. Unfortunately, poor financial decisions are made all too often. So, how do you acquire an asset while preserving your cash flow when you're a fast-growing company? We'll explain everything!

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Alternativesto buying

We often hear that "cash is king" when it comes to managing a company's finances, and that's even more true when your business needs an asset (hardware, vehicles, equipment, etc.) to operate. The problem is always the same: how do you finance it? The classic option is to buy it, often using equity funding or generated revenue. But be careful: this money is usually earmarked for various needs (investment, business development, international expansion, working capital, etc.). And it isn't unlimited! So, it's better to think about other solutions to keep your cash.

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Finance lease: leasing with an option to buy

Afinance lease, orleasing, allows you to rent an asset while keeping the option to buy it at the end of the contract. It's an ideal tool if your goal is toeventually become the owner, without immediately affecting your cash flow.

Example:If you run a start-up and need production equipment, such as servers or manufacturing machines, a finance lease allows you to use this equipment for 3 to 5 years by paying monthly rent. At the end of the contract, you have the option to purchase the equipment for a residual amount set in advance, which allows you to preserve your cash while having access to key equipment.

Key features:

• Purchase option: At the end of the lease, you have the option to buy the asset at a residual price that is often advantageous.
• Deductible expenses: The rent paid is deductible from your taxable income, thereby reducing your corporate tax.
• Who is it for?This is an ideal solution for start-ups or SMEs looking to acquire equipment essential to their operations or business model (technological equipment, production machinery, or company vehicles).

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Financial leasing (or equipment rental): maximum flexibility, no purchase obligation

Thefinancial leasing, orequipment rental, is an alternative to capital leasing. Here,there is no purchase optionat the end of the contract. This solution offers maximum flexibility for companies that do not need to own their equipment and prefer to upgrade their hardware regularly to stay competitive.

Example:If you run an SME specializing in digital marketing, you might need up-to-date computer equipment for your team. Rather than buying computers and having to replace them in a few years, you can opt for financial leasing. This allows you to lease computers for a period of 2 or 3 years, then return them and lease new ones, ensuring your team is always working with high-performance equipment.

‍Key features:

• No long-term commitment: You return the equipment or extend the lease, without worrying about it becoming obsolete.
• Flexibility: You can regularly upgrade your equipment — and thus stay up to date with the latest technology.
• Who is it for?Ideal for start-ups and SMEs in sectors where rapid equipment obsolescence is a concern, such as tech, consulting, healthcare, or design.

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The HaaS model and customer risk: capital leasing vs. financial leasing

If you offer aHaaS(Hardware as a Service) model to your clients, how you finance your equipment is paramount. In a HaaS model, your clients pay a subscription to use the equipment you provide. The risk is that they may not always meet their payment obligations. How, then, can you protect yourself againstcustomer payment defaults?

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Leasing: you bear the risk of payment default

Underfinance lease, you are the one who assumes the risk if your end customers do not pay. Even if your customers fail to meet their commitments, you must continue to pay your lease installments to the lessor. This risk can quickly weigh on your cash flow if several of your customers default.

How does it work?

• The lessor buys the equipment, and you lease it with an option to purchase at the end of the contract.
• You make this equipment available to your customersas part of your HaaS offering.
• In the event of payment defaultby your customers, you must continue to pay the lease installments to the lessor.

Pros & Cons:

• High financial risk but lower costs: You bear the risk in the event of payment default by your customers, which significantly reduces the financier's risk and therefore the cost of financing.
• The lessor mustapprove the equipment being leased.
• More complexto manage, especially if several unpaid debts accumulate.
• You need signed contracts with high-quality clients and long terms (minimum 24 months) to reassure the lessor.

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Financial carry: the financier takes the risk

The big advantagefinancial leasing? The financier assumes the risk of non-payment by end customers. You don't have to worry about managing customer receivables. The financier leases the equipment directly to your customer and takes on the risk of non-payment.

How does it work?

• The financier buys the equipmentfor you and leases it to you for a fixed term.
• You use this equipmentas part of your HaaS offering, and the financier handles the payments.
• In the event of payment default, the financier takes on the risk, freeing you from the headaches of managing receivables.

Pros & Cons:

• Peace of mind: You don't carry the risk of customer receivables. As you might expect, peace of mind comes at a price, and rates are naturally higher.
• Flexibility: At the end of the contract, you can upgrade your equipment without tying up capital.
• Ideal for scaling quicklywithout worrying about payment defaults.

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Which solution for your HaaS model?

For aHaaS (Hardware as a Service)model, startups generally turn toequipment rentalwhen they are just starting out. This solution allows you tomitigate risksrelated to receivables, as initial clients are not always the most reliable when it comes to payment. Financial factoring therefore provides security by transferring a portion of the risk to the financier, who manages the relationship with the end client.

However, financial carry has ahigher cost, particularly in terms of rates, because this peace of mind comes at a price. Monthly payments are generally higher than with a finance lease. This is why, as the companygrows and stabilizes its customer base, it becomes wise tocombine financial carry and finance leasing or switch to a 100% finance lease model.In a HaaS model, where margins are key performance indicators, optimizing costs is essential to ensure profitability!

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Whether you're talking about finance leasing or financial carry, both are options worth serious consideration for structuring your financing and managing your debt without impacting your cash flow. At Super Capital, we help you choose the best solution for your situation. Don't hesitate to contact us so we can help you optimize your investment strategy! 😊

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