As a business owner, it’s important to always be looking for ways to improve your operations and maximize your profits. One way to do this is by investing in new equipment or upgrading your current machinery. However, the upfront cost of new equipment can be a significant financial burden, and many business owners may be hesitant to take on debt, especially when interest rates have risen substantially.
While it’s true that rising interest rates can make financing more expensive, there are still several reasons why it may be worth considering financing equipment for your business.
1. Equipment leasing can improve cash flow
If you choose to lease your equipment purchase, you can spread the cost out over 4 or 5 years instead of paying for it all upfront. This can help improve your cash flow by allowing you to allocate your funds towards other business expenses or investments. By leasing equipment, you can make smaller, more manageable payments over an extended period, allowing you to preserve cash and maintain liquidity. If there is a temporary slowdown in the economy, then you will have more cash reserves available than if you simply paid cash for all your equipment
2. Equipment leasing can help you stay competitive
Investing in new equipment can help you stay competitive by improving your productivity, efficiency, and quality. The labor savings alone can usually cover the monthly payments for your equipment. For example, a manufacturer who upgrades their machinery to a more advanced model can produce goods more quickly and at a higher level of quality than their competitors who are using outdated equipment. By leasing new equipment, you can stay ahead of the curve and maintain your competitive edge.
3. Equipment leasing can offer tax benefits
Leasing equipment can also offer tax benefits for your business. Depending on your location and the specific leasing option you choose, you may be able to deduct a portion or all of the equipment lease as a business expense. This can help lower your taxable income and reduce your overall tax liability.
4. Equipment leasing can be a hedge against inflation
The cost of equipment has risen in the last few years and expectations are equipment costs will continue to increase. Delaying on a purchase only means a higher expense in the future. However, if you lease your equipment purchase, you can lock in the cost of the equipment at the time of purchase, protecting yourself from the effects of inflation. In other words, the payment on the equipment will remain the same regardless of how much inflation increases over time.
5. Equipment leasing can be flexible
Finally, equipment leasing can be flexible to meet your specific needs. There are many different leasing options available, including deferred and seasonal payment options and low upfront advance payment options
6. Equipment leases can help improve your financial profile/balance sheet compared to a cash purchase
The strongest asset a company has are its liquid assets (cash and receivables). By utilizing an equipment lease, a company can keep more cash in it’s accounts while utilizing a longer 4 or 5 year term to minimize the impact on the company’s current debt ratios. The more liquid assets a company has to cover the debts/payments due over the next 12 months the stronger they are financially.
In conclusion, while rising interest rates can make financing more expensive, there are still several reasons why it may be worth considering leasing equipment for your business. Equipment leasing can improve cash flow, help you stay competitive, offer tax benefits, be a hedge against inflation, and be flexible to meet your specific needs. Before making any financing decisions, it’s important to consult with a financial professional and carefully weigh the costs and benefits of each option.
