Asset finance in the sustainable development context

December 26, 2022

Asset finance can be an essential tool for driving economic development, particularly in rural areas. In particular, asset finance can enable communities to purchase the material necessary projects that have the potential to transform their local economies. Through asset finance, financial investors and corporate entities can also mitigate some of the risks associated with investing in sustainable development projects, helping to alleviate poverty, improve livelihoods and create economic opportunities within communities while also generating a financial return.

What are some examples of asset financing in the sustainable development context?

Asset ownership can transform the way a community works, allowing people to take greater control of their economic destinies. For example, in the agricultural sector, having access to agricultural equipment can form the basis of an agriculture cooperative that in turn allows a community to transform and sell farming outputs. This includes access to mechanized farming equipment, irrigation systems, greenhouses, and other high-cost items necessary for sustainable agricultural production. In Africa, investments in equipment to transform cassava or peanut into flour and oil can help a community generate consistent revenues and form the basis for long-term sustainable growth, particularly for women.

In the energy sector, projects such as biogas digesters can be a cost-effective and reliable source of power to rural areas. Not only can biogas from organic waste can provide clean fuel for heating and cooking, it can save households time and money, all while having a positive environmental impact. In addition, solar minigrids can provide energy to rural areas, opening up access to electricity for those who are far from the grid and reducing reliance on diesel generators.

In education, asset financing can help purchase the equipment and materials for educational initiatives, such as providing computers in schools or investing in libraries that allow students to access both print and digital resources. It can also be used to purchase school buses, reducing the safety risks of students having to walk long distances, or to create vocational training programs, helping to equip young people with essential skills for future employment.

Asset finance also has multiple applications in infrastructure development, such as motor vehicles, public transport networks and water supply systems. These assets enable increased access to essential services, helping to improve quality of life for individuals and communities.

What types of asset financing can be used in the development context?

Asset finance can include various types of financing arrangements that allow businesses to purchase materials, such as agricultural inputs and equipment, while spreading the cost of those purchases over a period of time and providing a path towards ownership. Common asset finance arrangements include lease finance, hire purchase, outright purchase and asset-based lending.

Each of these asset financing options has its merits and disadvantages. For example, asset-based lending can provide a business with the capital it needs to invest in development projects up front, while lease finance allows businesses to spread the cost payments over a period of time. Hire purchase and outright purchase arrangements can offer businesses more control over the asset, allowing them to use it as collateral for future financing.

Regardless of the chosen structure, it is critical that the terms of the financing be flexible, with realistic expectations on both sides. This means proposing commercial and payment terms that are consistent with the project's overall objectives and profitability model, with the possibility of restructuring, and ensuring that asset ownership will be transferred to the business or cooperative as the business evolves.

What are the benefits associated with asset finance?

Transforming business scale. Asset finance can be used to purchase the specific asset a business or cooperative needs, allowing it to increase or reduce its scale as needed. This means that businesses with limited capital outlays can still invest in asset-heavy industries like agriculture and energy, providing access to innovative technology and reducing risk exposure.

Reducing financial risks. By spreading asset costs out over a period of time, asset finance can protect businesses from the financial risks associated with up-front investments. This helps to ensure that all parties involved in asset financing are able to benefit from long-term economic growth and stability.

Increasing access to capital. Asset finance can help bridge the gap between asset needs and available capital. It reduces the amount of capital needed up front and allows businesses to access more flexible financing options, increasing their chances of success.

How can investors manage the risks associated with asset finance projects?

Materials can be collateralized. Asset finance arrangements can be structured such that asset ownership is transferred to the asset user at the end of the agreement. Investors can devise a framework where asset collateralization occurs, providing them with additional security against potential losses.

Tax benefits for investors. In some asset finance projects, investors can benefit from tax savings or other incentives. These can be beneficial to both the asset user and the investor, helping to increase returns on investment while reducing costs for asset users.

Use of asset insurance. When asset financing is used in development projects, asset insurance may also be necessary to protect investors against potential losses due to asset damage or destruction. Asset insurance can provide additional protection against financial losses, helping to ensure that asset finance investments are successful.

Looking ahead

Asset finance is a powerful tool for supporting development projects in communities across the world, particularly in rural areas. It allows businesses to access asset-heavy industries that might otherwise have been out of reach and provides investors with innovative solutions to manage their asset risks. By understanding the key benefits and managing potential asset finance risks, businesses and investors can take advantage of asset financing to achieve their development goals.

In any case, risk mitigation strategies should also be put in place throughout asset financing projects. These approaches include conducting thorough due diligence to ensure asset quality and asset user viability, assessing the asset user's creditworthiness, and providing asset protection to guard against potential losses.

By taking a development-driven approach to asset finance and understanding the risks involved, investors can provide asset users with the opportunity to transform their local economies and lives. By leveraging asset finance, businesses and investors can work together to create sustainable economic opportunities while minimizing risk.

CPM