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March 23rd, 2018
5 reasons equipment financing makes more sense than paying with cash
For those involved with their company’s financial strategy, two factors inspire smiles: the booming economy and slashes to the corporate tax rate.
Business managers in particular will see the additional capital as an invitation to invest in much-needed new equipment purchases.
Because the business environment is so favorable, many will consider making purchases with cash, rather than considering different options for equipment financing.
The big motivation behind wanting to make an equipment purchase with cash is that it simplifies the process — after all, there’s no loan or application process. Plus, without the need to pay any interest on a loan, it costs less.
Though this may seem like a reasonable way to proceed, paying for equipment with cash rather than by financing doesn’t ultimately make sound financial sense.
Financing equipment allows businesses to retain larger reserves, stay nimble, invest elsewhere and grow their business faster. So while you might have cash on hand, here are five reasons you should finance your next equipment purchase.
1. Financing equipment helps establish long-term commercial credit
Imagine if every purchase could only be made with cash. Few companies would ever get anywhere or be able to make the purchases needed to grow. It all goes back to that old saying: It takes money to make money.
This is just what financing does: It provides the capital for companies to grow, to purchase new equipment and to make more money.
Even if you have the cash available to make a purchase, there’s one major reason why you should finance equipment: It builds long-term business credit.
There may be times in the future when you do not have the cash needed to purchase needed equipment or software. In such situations, which virtually all businesses find themselves in at one point or another, having a high credit score for your business could help you secure the needed financing at a lower interest rate.
2. Financing makes it easier to budget
If you choose to make a major equipment purchase, doing so with cash will blow a hole in your budget for the month or the quarter. This can cause an irregularity that can complicate your budgeting process.
Monthly payments are much easier to manage. Instead of large financial outlays, consistent monthly payments make it easier to allocate money to other projects and maintain a steady cashflow.
3. Get the latest and greatest from your equipment purchases
To stay competitive, businesses need to invest in the best technology. This isn’t always cheap. Paying cash for a top-of-the-line product can severely restrict your cash flow. You might be tempted to purchase a second-tier piece of equipment because that’s what you can afford to pay cash for.
By financing your software or equipment and breaking payments down into much smaller increments, you’re able to purchase higher quality, more expensive products.
4. Keep some wiggle room
Take an example from the world of personal finance:
Most financial planners will warn against putting your savings into paying off a house, a car or student loan debt. The reason is that if you do this, you won’t have the money to put toward life’s other big purchases. In that way, paying off debt too fast can bind you up.
This applies to paying for equipment with cash. Though you might have the funds on hand, a big purchase will eat up a lot of capital and could leave you strapped, preventing your company from going in the direction it needs to go.
5. Interest rates remain historically low
Even with interest rates slowly increasing, they are still incredibly low. This means that financing equipment remains an extremely cost-effective solution that comes with many of the benefits already mentioned. The next several years are an ideal time for new equipment purchases.
Companies don’t choose to finance equipment purchases because they don’t have the money upfront. They do so because it’s part of a sound financial strategy that allows them to maintain a fluid stream of funds, which contributes to a company’s overall health and expansion.