In a recent independent survey of 2412 Business Owners (less than $30,000,000 in revenue) that make at least 2 equipment purchases per year…
- Companies that pay cash for equipment keep equipment longer
- Companies that pay cash for equipment have higher maintenance expenses
- Companies that pay cash for equipment have more equipment downtime
- Companies that pay cash for equipment have more employee turnover
Think about it–the longer you keep equipment the higher the maintenance expense. Higher maintenance expenses typically mean that there are “down time” expenses because of equipment failure. And while these events are occurring, small businesses are perhaps missing the single biggest negative impact.
The most damaging by-product of the “pay cash and run it till the wheels fall off” strategy is not rental expense, maintenance or even the pain of cash flow spikes—it’s employee turnover. As a business owner, your single biggest expense is most likely labor. Your people. Finding good ones seems to be getting harder and the cost of losing and then finding another good employee is extremely expensive and disruptive to a small business. When your company is using older technology and equipment leading to issues of “down time” and inefficient performance—employees leave.
82% of 7,226 small business equipment operators (from entry level to advanced in industries ranging from construction to IT) said current equipment was a major factor in their job satisfaction.
No wonder the same research revealed that companies that paid cash reported higher turnover among equipment operators. Financing allows for companies to stay on the cutting edge of technology. A simple monthly payment for a period of time, only to replace the equipment at the end of the finance term with the newest model and/or technology. Financing executed the right way becomes a program to ensure your company and more to the point—your employees—have the tools to do the job.
And don’t sleep on the small stuff. Many times business owners wouldn’t think of not financing the $100,000 purchase but are paying cash for the next 3 laptops or the used trailer. These items are often the most impactful to the employee experience and from a financial point of view can add up to be significant monies.
The right finance partner can help. American Financial Partners makes commercial equipment more affordable for businesses like yours. And by opening your mind a bit, you might just build a better work environment along the way as well. Let’s talk.
For the last several years, our beloved politicians have made the decision to limit the deduction potential of your equipment purchases. But after almost eight years of sluggish recovery and once in a generation slowness for capital investing, the light bulb finally came on in December of last year and you can acquire new commercial equipment for a large discount if you take advantage of this new legislation.
Late last year, Congress brought back the strength of the Section 179 Tax Deduction for businesses. Under the “Protecting Americans from Tax Hikes Act of 2015,” the Section 179 limit is expanded to $500,000 with additional benefits of bonus depreciation for amounts over $500,000. The new law will make this a permanent change and that is really big news! But 73% of small business owners still haven’t gotten the word. In a recent survey more than 7 out of 10 small business owners didn’t understand the financial impact on the affordability of commercial equipment. Well, let’s fix that.
The Section 179 deduction often allows small businesses (subject to specific limitations) to deduct upfront, rather than depreciate over a number of years, the cost of equipment such as computers, vehicles, manufacturing equipment, farm machinery, office furniture, etc. Combined with the benefits of bonus depreciation, the incentive to acquire equipment and stay on the cutting edge of technology is significant.
That’s a savings of up to 35% (depending on your tax bracket and specific situation)!! Each year these assets need to be purchased and put into service by Dec. 31 to qualify for taking the deduction in that tax year. Please also note that businesses exceeding a total of $2 million of purchases in qualifying equipment will have the Section 179 deduction phase out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, under this new law, the Section 179 cap will be indexed to inflation in $10,000 increments in future years. 50% Bonus Depreciation will also apparently be extended under this legislation through 2019, and will be phased down to 40% in 2018 and 30% in 2019.
Start planning now
By working closely with your tax advisor and an experienced equipment financier, you might be able to put more or better revenue producing equipment in-service. You can stop running equipment “until the wheels fall off”. You can bid on that new project more effectively. You can put more revenue producing equipment in-service. A little planning as we approach the 4Q can position your business to maximize this tax deduction and your opportunities for growth.
At Red Thread, we work with customers every day to maximize their equipment purchasing power—putting more revenue producing equipment in-service—with a simple process. If you’d like to discuss how to leverage Section 179 to fuel your growth between now and the end of the year, give us a call.
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.