Every business needs equipment. You cannot do business without the quality tools required to engage and satisfy your customers. Whether you need computers, telephones, security systems, that new lift for your garage or the latest oven model for your restaurant, evaluating what you will need and your options for obtaining it are sure-fire steps in the right direction. Finding the right dealer and the right equipment solution is no easy task, but figuring out how you are going to pay for what you need is going to be another issue that you are eventually going to have to deal with.
So how exactly are you going to pay for the equipment that your business needs? In this article, we are going to talk about the pros and cons of three different payment options. Exploring the ups and downs of different options before you jump into one of them could save you a lot of money and trouble down the road.
Alright, let’s get down to business.
Option #1… Using Personal Cash
Cash is an obvious payment method that most people will utilize if they have it available, though it is important to note that personal cash is different from cash capital owned by your business. If you are a sole proprietor, then there may not actually be much of a difference between the two—though in the vast majority of circumstances these are two very distinctly different things. Personal cash is cash that literally belongs to you, while cash capital is money that is technically owned by your business.
- If you have the money just sitting around, this might be a good investment in your future
- No interest, which to helps reduce overall expenses
- No debt, which could be critical if you are trying to borrow a large some or meet specific bank covenants
- The equipment is yours to keep for as long as you need it (or for as long as it lasts)
- You are taking a personal risk when you tap into personal funds
- If the business doesn’t work out, that is money that you can’t really get back unless you can sell the equipment
- Some people do not have this kind of cash lying around, making this option a non-possibility for them
Option #2… Using Business Capital
If your business has investors, has been injected with cash from one or more sources, or if you are cash-flow positive, then you probably have some capital on hand that you could use to buy your equipment or supplies with. Having money on hand may not be a luxury that every business can take advantage of, though it can be a very low-stress method for acquiring what you need. Of course, one of the downsides of utilizing your capital is that there is almost never enough at first to get everything that you would like to have. This can leave you, as a business owner, conflicted about how to spend the money. You may eventually come to decide that the cash could be better used elsewhere, though this mostly depends upon your situation.
- Allows you to purchase your equipment without creating debt
- Allows you to purchase your equipment without incurring personal risk
- No interest payments
- No on-going monthly expense payments
- Your business will own its own equipment outright
- Not every business has available capital that it can use to purchase its equipment, making this an option that some will not have access to
- In some cases, you might find that you will need to use what capital you have on other critical purchases
- Equipment can, admittedly, take up a large part of your budget—making options like financing or leasing more attractive if you have limited funds
Option #3… Third Party Financing
Third party financing differs from a bank loan in that the financing is provided and administrated either by the equipment dealer directly or by a third party financing company that they have partnered with. Not all equipment dealers offer financing, though many of the larger ones do—especially on their larger items or on items that cost more than a few thousand dollars.
Company financing definitely comes with its own set of pros and cons. One of the best things about it is that it is easy to get and saves you the trouble of getting a bank loan. One of the negatives is that the interest rates might not be as good as those that you would get from the bank. On the plus side, it may be easier for companies to qualify for dealer or third party financing because they typically have more liberal credit parameters when compared to most banks. Non-bank financing is usually much quicker, and this funding method also requires significantly less paperwork. Most important of all, non-bank financing does not require you to use the equipment as collateral as part of the loan agreement.
It should also be noted, however, that company financing does not always mean paying more interest. Some companies offer highly competitive interest rates that not even banks can compete with—so it is important that you very carefully consider your options before signing off on anything.
- Allows you to acquire your equipment with minimal up-front costs
- Saves you from the hassle of getting a bank loan
- Serves as a definite option for those who do not have enough cash on hand to purchase their equipment outright
- Makes it easier to obtain financing for companies with more challenging credit histories
- Rates will be based on the credit quality of your company
- Will require monthly payments—a portion of which might be interest
- Might not be as economical in the long-run as a bank loan (depending upon the company and on how good of a loan you can get from the bank)
We are going to continue this pros and cons list with three more equipment procurement options in another blog post, so make sure to check back!