A question business owners often ask, is it better to finance equipment or pay cash?
While it may appear on the surface that paying cash rather than using finance is the better option if you have the funds available, there are advantages and disadvantages to consider.
Benefits of paying cash rather than Financing Equipment
The benefits of paying cash rather than financing equipment include:
- The price has been determined; there is no further payment to be made
- You may be able to access the equipment you need faster
- You will own the equipment and can do with it as you like
- It will be less expensive as you won’t be paying any interest
Disadvantages of Paying Cash
While there are benefits to paying cash rather than financing equipment, there are some drawbacks to consider:
- It may put a strain on your cash flow
- In the event of unexpected events or opportunities, you may have less flexibility than if you had used finance
- Should you find yourself short of cash in the future, refinancing the equipment can be expensive. (Rates are likely to be higher than if you had financed the equipment outright, and you may need to pay to have the equipment valued)
- Paying cash may lead to a less considered purchasing decision
- Depending on the type of equipment, you may be at risk of redundancy
Benefits of Financing Equipment
The main benefits of Financing Equipment include:
- Preserves financial flow for unanticipated events or capitalise on opportunities
- The cashflow impact is spread over time
- Repayments can be structured to your cash flow – (Allow for seasonality, installation and commissioning, and the time it takes for the benefits to be realised)
- Interest rates at historically low levels and are fixed
- Interest is usually tax-deductible to the extent the asset is used for business purposes
- Allows you to build creditability with an alternate Lender
The Drawbacks of Financing Equipment
The drawbacks should you decide to Finance Equipment include:
- It will cost more overall compared to paying cash
- An additional commitment the business will need to fund
- Because the interest rates are fixed, if you want to pay out the contract early, you will face break costs
- If the finance is not properly structured, it can potentially strain your cash flow
Tips to Avoid Equipment Finance Pain
If you decide to Finance Equipment, I’ve provided some tips below to help you navigate the process:
- Before approaching suppliers, get your financing in order; this will give you a better negotiation position
- Consider finance in the context of all your existing financial commitments
- Understand the total cost of the finance rather than just the headline interest rate
- Make sure you’re comparing “apples to apples” when it comes to supplier finance
- Ensure that the finance is stand-alone and not cross-collateralised with any other security you may have provided to the Lender
- Take advantage of the opportunity to establish a new relationship with a different Lender
- Use an Equipment Finance Specialist rather than a Generalist Lender
Summary
If you are considering Financing Equipment and would like to learn more, don’t hesitate to get in touch.
As an Equipment Finance Broker, I can help you navigate the procedure and provide you access to our panel of Lenders, which includes all of the major Banks.
Our market access means Lenders compete for your business and this invariably delivers highly competitive rates, structures, terms, and conditions.
