When you’re buying equipment, should you finance it or should you pay for it out of cash?
Now, obviously it depends on how much it really is, but here’s a perspective for you. There’s a business that I’ve worked with for quite a long time and they’re doing okay, but they’ve never actually pulled a lot of money out of the business.
That’s because they’re endlessly buying more equipment and renovating offices and machinery and the like. You might say, “Well, that’s supporting the growth of the business,” But, it means they haven’t pulled money out.
Another option of buying a new piece of equipment and financing it, it means that you can take the money out of the business. But, there’s some pros and cons there.
For example, if you’re financing equipment, it’s probably going to be a higher interest rate, but the benefit is that at least it’s in the entity that actually owns it. In some ways, rather than taking some money from somewhere else or from off your home mortgage, for example, to buy equipment, at least it’s associated with the right entity. Also, it depreciates in a way that is more reflective in terms of the real value of the piece of equipment with respect to the cashflow.
That’s kind of important because after say five years, or as a vehicle, it might be not worth that much money, but it’s not showing on your balance sheet at its full value. And sure enough, accountants can work this sort of thing out, but smaller business owners, it becomes more complex to understand. So financing in that case supports better understanding of what’s going on in the business, but also supports you taking money out of the business for your own sort of family and home purposes.
I hope that’s a good perspective on whether you should finance or pay for things out of cash. I mean, the experts in this field are obviously your accountant and financial planner, but go to them with these sorts of questions and see what they have to say as well.