For years, popular “money experts” have preached that you should “never buy with credit what you can buy with cash”. And while this is a nice sentiment, it is more of a ideal than an actual recommended business practice. Many of these experts have forgotten one of the most universal rules of business—that any debt, regardless of rate, is usually far cheaper than equity. Or put another way, that using someone else’s money to pay for something is generally more beneficial than using your own.
Here’s a few reasons why financing is better than paying with cash:
- Equipment depreciates rapidly. Spending capital on something that is going to be worth less with every day that passes means you are stuck with useless equipment the end of that equipment’s lifetime. Imagine you purchase a $50,000 asset that will be worth $35,000 in 3 years. If you paid cash, at the end of that period you’d have $50,000 equity in a $35,000 asset. Not a great investment. If you financed it, you’d only be paying for essentially what you have used of the asset, preserving capital and cash flows along way.
- Soft costs can add up fast. When purchasing a comprehensive equimpment solution, soft costs like labor, installation, and maintenance are often not included in the sale price, which means you’re outlaying more cash initially than you would if you had decided to pay monthly for the same equipment.
- Upgrading equipment often can be expensive when paying with cash. When you outgrow your equipment, the burden of finding a new solution falls on you – the owner – and the process begins all over again. When you finance equipment solutions, you can easily upgrade your equipment, often for the same monthly payment, and not have to worry about purchasing new equipment.
- It’s easier to budget when you have a monthly payment. Paying cash outright for an expensive solution can mean that your operating expenses for that month, or year, are totally used up. This leaves no room for emergency spending and often times can eat away at reserve funds. When you make monthly payments, you can allocate the money you had previously budgeted into the operating expenses you need to address the most.
When cash reserves are nearly always plentiful and abundant, paying cash may have some merit as a solution. But who lives there? In a rapidly evolving, equipment driven economy, being nimble and adaptable to the changing landscape is incredibly important. The ability to upgrade to new equipment quickly and easily, and budget properly are just a few reasons why financing equipment projects make more sense than paying with cash.