It seems to be a common belief that paying in cash is always the least expensive option, but is that really true if we consider all the risk factors of making a large business purchase?
In today’s economy, a good portion of small business owners were successful in securing PPP funds or have excess capital to fund their large purchases, such as equipment. Many owners feel that paying cash for their equipment is the least risky way to expand their operations. Their two main reasons are:
(1) Fear of being locked into a payment over a long term or the fear of having to be committed while not knowing what the future holds
(2) The analysis that borrowing money has a cost, either in interest or a stream of payments that exceed the cost of the acquisition
While these are both valid fears, and it is important not to borrow what you can’t effectively pay back, what many owners fail to realize is that paying cash costs money too, and in a way that weakens the health of your business.
From a risk standpoint, paying cash eliminates your 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. A healthy business has six 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 (rent or mortgage, payroll, etc). This is how cash in the bank is used to insulate strong companies from temporary market weakness. If you choose to spend your cash reserve on equipment or other large purchases that could’ve been financed, it puts your company in grave risk when there’s already a fear of not knowing what the future holds.
It is more impactful in an inflationary environment to use cash towards investments such as real estate, precious metals, and dividend paying stocks, which can act as a hedge against inflation. You can look at a five-year chart on the Dow or gold and see the returns generated on these investments in 5 years exceed the cost of an equipment lease over the same period.
Building both your business and personal growth is important. For this reason, it’s recommended to finance your equipment so you can ensure your business has cash it can access at any point in time. There’s no need to put your business at financial risk when you don’t have to. Save your cash for times of emergency, not for acquisitions that don’t mandate a cash purchase.
If you are considering any acquisitions and want to discuss financing options, that can help your business affordably acquire what it needs without putting you at risk in an emergency, American Capital Group offers the Lowest Payment Guaranteed* and would be happy to assist your business towards greater financial health. Click here to talk to a representative today.