What’s the riskiest way to acquire equipment?
Many owners feel that paying cash on their acquisitions is the least risky way to expand their operations. Their two main reasons are:
- Fear of being locked into a payment over a long term while not knowning what the future holds.
- The analysis that borrowing money has a cost… either interest or a stream of payments that exceed the cost of the acquisition.
What many owners fail to realize is that paying cash weakens the overall health of your business. From a risk standpoint, paying cash eliminates available working capital. You never know when you may need working capital down the road for an unforeseen emergency or for marketing expenses that cannot be financed.
Consider the fact that a healthy business has 6 months of cash reserves to cover their expenses…that means if they have $0 revenue for 6 months in a row they have enough cash reserves to cover all their debts (building, payroll, etc)… cash in the bank insulates strong companies from temporary market weakness.
If your purchase involves equipment, as soon as the equipment has been bought, it is considered used. For your business, that means your cash investment instantly dropped in price and you have paid more for a piece of equipment than it is actually worth. It is like buying a new car at the dealership and losing 20% of its value once you drive it off the lot.
From the financial implications, paying cash reduces your current assets. Current assets are assets that can be liquidated quickly to meet debt obligations. Since underwriters view your current assets as the strength of your business, reducing this amount weakens your business. By financing your purchase, you keep cash in the bank and extend a long term debt. In addition, off-balance sheet arrangements may not impact your ratio at all since the debt isn’t recorded on the books.
At American Capital Group, we want to help keep your current cash in your account, and get the equipment in your hands to help you earn more cash to add to your account. Plus, American Capital Group makes the process simple and quick to get your equipment financing started.
CLICK HERE to find out how ACG can get you the best program for your equipment needs.