Effective management of cash flow is crucial to the success of every business. However, it’s particularly important for smaller and younger companies experiencing rapid growth. To reach the next level, they may need to invest significantly in new equipment, but this can significantly strain their cashflow – particularly if new customers prove to be slow payers. So when does it make more sense to consider equipment financing rather than purchase outright?
Outright ownership is often not the answer
Purchasing outright has a number of clear advantages: you own the asset from day one and will not have to pay any interest or finance company charges. However, the cash you invest in the equipment can be spent only once, and if you face a downturn you may find yourself having to let staff go or pass up other opportunities. In contrast, equipment financing by taking a lease or a loan allows you to secure the equipment you need whilst keeping more cash on hand.
All about loans and leases
Loans come in two types: secured and unsecured. Secured lending means that the loan is taken out against an asset you own already, and if you default on the repayments then the finance company can seize that asset. For this reason, business owners should be cautious about securing borrowing against their homes. With unsecured lending, the borrowing is not tied to a specific asset, and the lender needs to take more steps to enforce the debt; as a result, unsecured lending tends to be significantly more expensive.
Alternatively, you can consider leasing, whereby you have the use of the equipment for a specific period of time without actually buying it. The monthly cost tends to be lower than that for a loan, with the benefit of reduced paperwork and shorter lead times. However, you will never become the owner of the asset and will need to organise new equipment financing once the existing arrangement has expired.
So what are the major advantages of borrowing or leasing?
With equipment financing you can keep more cash on hand
This is probably the biggest advantage: you can preserve your cashflow, meaning you will have the funding you need to react quickly to business opportunities. Whether it’s hiring new team members, launching a marketing initiative or simply stocking up to meet the demands of a major new customer, you can find yourself at a significant disadvantage if you don’t have the cash you need to take immediate action.
You can save on hidden costs or spread them out
The headline cost of new equipment is only part of the expense, as you need to factor in delivery, installation and maintenance. Opt for an equipment loan and you can spread these costs out over a number of years, as well as the headline price of the equipment. With leasing, installation is normally included in the monthly fee, so should the equipment fail after the guarantee expires you won’t find yourself out of pocket.
You can keep your accounting simple
Equipment financing by way of leasing means you don’t need to worry about depreciation and writing-down allowances: you simply treat the monthly charge as a cost to offset against your profits. If you’re a small business owner who prepares your own financial records, this can save you a great deal of time over a number of years.
Right now, it’s cheap to borrow
With base rate at an unprecedented low of 0.5%, there’s never been a better time to take out a business loan. Of course, it’s also true that banks and other financial institutions have become much more cautious about lending since the crash of 2008, so businesses without a proven track record could struggle – that’s where alternative lenders come in.
Alternative lenders can be the answer
If you can’t get the equipment financing you need from a bank and don’t wish to lease rather than buy, alternative lenders can lend a hand. With asset-based finance, you can buy new equipment via a loan secured on your existing premises, plant or other assets, and with invoice factoring or discounting you can free up your cash flow to make an outright purchase by borrowing against the value of your invoices as soon as you issue them.
Whichever route is right for you, you can have your cake and eat it – acquiring the equipment you need whilst keeping the cash on hand to power the growth of your business.
As Managing Director of Cashsolv, he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business. Carl continues an ethos of working with distressed businesses to help them overcome their financial problems.