What is asset based financing or leasing?
This is a form of bank facility which involves finance of movable assets, plant and equipment. These include vehicles, manufacturing equipment, generators, aircrafts, and ships/marines, among others.
Under leasing, you don’t have to spend a lot of money upfront to use the equipment you need. You have an option of a finance lease (at the end of the lease period, the asset under the lease becomes your property) or operating lease (at the end of the lease period, the asset under the lease does not become your property. It is returned to the lessor or the company that leased it to you).
Before signing any contract for a lease financing, ensure that you understand fully the terms and conditions of the lease, the lease type and the lease period. It may be cheaper to obtain financial advice early on to ensure that your decision is well informed. You need to evaluate whether the lease terms are appropriate for your business or asset type.
What is the security in case I decide to go for the leasing option?
The security is the asset being financed. The client makes a minimum equity contribution of 10% while the bank finances up to 90% of the asset cost.
If it is a lease, you don’t need to provide another asset as collateral and avoid dealing with institutions that may ask you to provide more collateral in addition to the leased asset as it is not necessary.
Why would I go for leasing instead of other form finance?
Leasing allows you an opportunity to utilize your cash flows in other business ventures instead of locking them up in a movable asset. For example, the bank finances the asset and the client pays for its rentals towards the economic use of the asset. Leasing is also good for clients without landed collateral as the asset acts as the collateral.
Why do banks like financing newer vehicles yet they are very expensive?
Brand new vehicles have a higher useful life than old vehicles. Whereas they seem expensive, they have higher economic gain in the long run. More so, brand new vehicles in most cases have franchise dealers in Uganda which avail spare parts and provide uptime maintenance and servicing because they have experts to do the servicing and maintenance.
Although new vehicles, if used in the business appropriately, are preferred as they involve lower operating costs over their useful lives, It is not necessary to invest a lot of money in buying expensive new cars just for personal use, prestige or as a luxury.
Should I buy / import an asset instead of purchasing it locally?
Whereas banks usually have accredited vehicle and machine suppliers, they do accommodate importation of assets. However, the risk is borne by the client. What the banks do to reduce the risk is to send a Letter of Credit to the supplier instead of directly sending cash.
This way, the risk of fraud or loss of funds is reduced.
What is the maximum tenor for leasing products?
The maximum tenor is five years. This is because moveable assets often have a useful life not exceeding five years.
If I purchase an asset for example a vehicle, can I claim my Value Added Tax (VAT)?
Yes you can, but only if you are VAT registered. Being tax compliant and knowing which taxes to claim is critical for your cash flow management and savings. Always ask your trusted financial advisor, public accountant or external auditor. You need to find out whether your ‘Accountant’ is a certified public accountant and licensed to practice in Uganda as required by the Accountants Act, 2013 laws of Uganda.
Insurance is very expensive especially when one is purchasing a fleet of vehicles. Any provision for the banks to help out?
Yes, banks have a product called the Insurance Premium Finance, which was designed for such purposes. The beauty about this product is that it is not secured.
Do I have to pay any money to the bank before I gain economic use of the asset. If yes, how much?
The client is required to make an equity contribution, which depends on several factors. Key of all is the year of manufacture of the asset plus its resale value and reliability (ease with which a financial institution can dispose-off an asset in case of default by the lessee).
Brand new assets attract a lower equity contribution than the pre-owned assets. Likewise assets like tractors and highly specialized machines which are not easily realizable attract a higher equity contribution.
What are the advantages of having my insurance financed by the bank?
This has several advantages embedded. First the bank, also noted as first loss payee (meaning in case of an eventuality, the bank is considered first for payment in case of a claim) has a bigger bargaining power so it is easier to compel the insurance Company to pay rather than if you confront it as an individual. The process of making a claim is at times expensive and time consuming. However, banks employ the services of experts (at no additional cost to the client) who pursue the claim.