By Gabe Makhlouf
Chalk it up to simple economic realities, but a capital expenditure requires quite a bit of forethought these days. Should you buy the equipment you need with cash, or should you take out a loan or lease the equipment you need? These are the questions business owners are asking now that the economy is showing signs of improvement.
If you are a business having difficulty raising capital, one consideration may be an SBA equipment loan, as it provides 100 percent financing with terms up to 10 years, whereas banks typically require a 20 percent down payment for a conventional loan. Another option would be to tap into the equity in existing equipment to obtain 100 percent financing. There are types of equipment, such as computer hardware, software, restaurant equipment and office furniture, that are difficult to finance, and leasing may be the best alternative. In these cases, the leasing company is the owner of the equipment and assumes the risk of obsolescence or later marketability in a limited market.
Here are other items to consider before your next equipment purchase.
Many factors come into play, such as types of equipment and its useful life, economic conditions, tax consequences or advantages, and the company’s current financial condition. Questions to ask include, how long are you keeping the equipment? Can you utilize the tax benefits? If cash flow is an issue, is 100 percent financing more attractive via a lease or SBA loan than a conventional term loan where a 20 percent down payment may be required? What are the advantages of purchasing equipment rather than leasing? Although there are many individual advantages to purchasing equipment with cash or a loan versus leasing, these advantages can be placed into the following categories.
In this recovering economy, many companies that have delayed equipment purchases may think they can easily purchase used equipment. However, that has proven difficult, as inventory is limited and, consequently, prices have risen. As a result, many companies are shifting toward buying new equipment as the cost and benefits outweigh buying used. Should businesses purchase equipment with cash? You may believe that if you have the cash available to acquire necessary new equipment, you should pay with cash, because it is less expensive than financing the equipment through a bank or equipment finance company. But it is important to ensure that your business remains liquid and has plenty of cash available to manage through any setbacks. A business can fail because of a shortage of cash, even while showing accounting profit. Also, the greatest opportunities to grow and expand often appear in times of market turmoil, and it takes cash to take advantage of those opportunities.
Talk to your banker about a financing solution that optimizes your cash flow while meeting your accounting and tax objectives and your business needs. Interest rates are low and lenders are eager to help in this area.