You might be like some business owners we speak with that are considering paying cash for an upcoming equipment acquisition. What many of these owners don’t realize is that by paying cash on items that can be financed or leased, they are giving up a large amount of future profit. The cost of funds to acquire assets has been extremely low, and inflation is forecasted to continue to significantly rise.
Consider these two business owners acquiring equipment valued at $50,000. Both have enough cash in the bank to cover the acquisition.
Owner 1:
- Pays $50,000 for equipment in cash.
Owner 2:
- Finances the equipment at a 5% rate (cost of $56,580 over 5 years) and invests $50,000 in cash in a mix of conservative dividend paying stocks with payout ratio of 4% per year. Value after 5 years is $60,833.*
Now an unforeseen circumstance occurs and the business owners need cash quickly.
Owner 1:
- Has to sell the equipment, takes weeks to complete the sale and is forced to take whatever the market will pay. Owner also will likely receive a capital gain tax because equipment was fully depreciated under Section 179.
Owner 2:
- Instantly liquidates all or a percentage of his stock holdings for instant capital.
As recent times have proven, it’s important to think long-term outcomes on today decisions with capital as an unforeseen event that can alter our business and lives can occur. If you are adverse to the stock market because a previous bad experience, consider the fact that other investments appreciate and equipment does not. Rental real estate, Crypto currency, etc. when given a 4-5 year timeline can generate a significantly better return than the cost of financing the equipment.
If you’d like to discuss an equipment acquisition you are considering, give us a call to discuss more about your plans at (949) 271-5800.
