News Release 3/08 For immediate release March 19, 2008

The key to running a sustainable finance company is good hard cash

“Cash is king” when it comes to running a finance company and the lack of it has contributed to the downfall of many companies within the non-banking sector. During the last two years, 15 finance companies have fallen into receivership in New Zealand, with millions being lost due to bad company management and a failure to keep a tight control over loan books.

“Managing cash flow is a key part of running any successful company, and when your business is money, cash flow takes on extra importance”, says Clive George, Managing Director of Asset Finance Ltd. With over ten years in business, Asset Finance grown steadily with assets of over $24 million under management and a solid and unblemished record.

Recent high profile collapses have dominated the headlines and the negative press that the sector is receiving has meant that people are understandably not as comfortable with investing in finance companies as they had been in the past. However, companies such as Asset Finance, continue to provide investors with attractive rates of return from investments that make sense.

George explains that the abundance of investor funds in recent years has meant that some finance companies have become frivolous in their loan books, failing to keep a tight reign over their balance sheets, and in particular, their cash flow. “This is where good companies have differed. Management teams have kept their feet firmly on the ground and continue to be realistic about the environment in which we do business. That’s definitely the culture we have here.”

There are a number of core values that are central to the management philosophy at these finance companies. By avoiding property development and motor vehicle leasing, lending only to the right people and maintaining good cash flow at all times, management teams can be confident they can maintain a strong and sustainable business, and one which can continue to grow. “At Asset Finance, we believe that the safest finance companies are those that maintain a very balanced spread in the loan book and avoid those sectors that are likely to have any adverse impact on trading,” added George.

“Tying up depositors’ monies in property development, for example, exposes finance companies to unwanted cash flow risk, and it is something sensible finance companies are just not prepared to do.”

For those that do expose themselves to property development, it is a long-term investment, meaning they are investing now with the view to recouping their borrowings maybe three to five years down the line.

However, George points out that typically, depositors do not want to tie their money up for that long, instead preferring investments which are maturing in 12 to 24 months time. “Effectively, the finance companies are lending long and borrowing short, leaving them reliant on new investors paying off their existing customers or on existing customers reinvesting their maturing monies with them”.

According to George, it has been this over-reliance on reinvestment that has led to some of the recent collapses. The accompanying fall in investor confidence is also compounding the industry’s woes, with reinvestment rates reported to have fallen sharply across the sector. He added that while his own company has experienced this first hand, it is not overly reliant on reinvestment rates and is able to continue to operate successfully.

“It is here where cash flow management becomes important,” he says. “It allows us to ‘weather the storm’, safe in the knowledge that our investors will continue to be paid as and when their deposits mature”.

By lending only to credit-worthy individuals and to companies, it is possible to maintain an average deposit term of around 32 months. In contrast, the average loan term is around 20 months. This cushion between inflows and outflows means companies like Asset Finance can continue to meet financial obligations - comfortably - even during more difficult periods such as those the industry is now facing.

George goes on to say that lending to the wrong people only exacerbates the reinvestment issues; “Asset Finance is very careful about who it lends to. Only one in three loan applicants meet the company’s strict credit criteria, with the rest being refused funding. It also takes the security of the underlying assets into account when considering applications.
“For example, financing the purchase of motor vehicles is another definite no-go area for Asset Finance. Why should we lend to purchase a second-hand car, when the value of that asset will depreciate by thousands as soon as it’s driven off the yard? Filtering out the higher risk borrowers and ensuring that sufficient collateral exists in the case of default provides our investors with the reassurance of knowing that they’ll receive all of their payments in full and on time”.
 
Spreading the risk should also be an important part of a finance company’s cash flow management strategy. Its diversified loan portfolio, from which it receives standard weekly or fortnightly payments, can be a real advantage to clients.

“On average, in our case around 8000 separate interest payments are received from borrowers, which amounts to approximately $2m cash inflow every month. While this may not sound all that glamorous, you’d have to agree that spreading the risk over a large number of borrowers makes good business sense,” added George.

“Do not let the downfall of those companies seeking high returns without fully acknowledging the risks put you off investing elsewhere in the finance company sector. Attractive returns from sensible investments are still available. Trust in a company that will always focus on the diversification of risk and whose investment processes concentrate on cash flow management and the avoidance of any unnecessary reliance on reinvestment rates”.

For more information contact:

Clive George                                                                                                  021 351 341

For media assistance contact:

Richard Gee                                                                                                 021 0271 1926