Many business owners delay capital equipment purchases until they have the cash in hand to pay for it. While that may be a sound strategy, paying cash for these new business items could actually drive down your profits.
Consider one business owner’s dilemma…
Mr. Smith’s cafe employees are complaining daily about the crowded customer eating area, with many clients leaving because there’s not enough tables and chairs for comfortable seating. They also tell him he needs a larger counter to serve more customers in a timely manner. He’s debating whether he should wait six months when he’ll have enough cash on hand to pay for these customer area improvements outright, or find a way to expand now. The new business items he’s pricing total around $30,000.
Financing now could mean profits sooner
Mr. Smith’s dilemma is not uncommon. Like so many successful business owners, he’s contemplating growing his store to better serve his customers by reducing their wait times and making the customer seating area larger and more attractive. If Mr. Smith used financing as an investment strategy, it could look something like this:
Let’s say Mr. Smith can serve 30 more customers a day with an improved seating area and additional counter space. With an average ticket revenue of $10, that’s more than $300 per day in new revenue, or $9,000 per month, since he’s open every day. With an assumed monthly equipment loan of $1,500, Mr. Smith’s business has still gained $7,500 per month with additional revenue from serving more customers.
Many financial experts would agree that Mr. Smith earned a sound return on his initial investment.
What if I have cash to pay for my new business furniture now?
While cash may be the right decision for some, many successful business owners still choose to retain cash for marketing, payroll and—when the situation is right—making investments that could earn a better rate of return. It comes down to determining how you want to manage your business finances. Using the above example, Mr. Smith actually increased his cash flow by $45,000 ($54,000 additional revenue over 6 months minus $9,000 for 6 months of loan payments)—money he can use for other business expenses.
Possible tax benefits
Whether you purchase or finance equipment, you may want to consider expensing it via Section 179 of the tax code. Many business owners consult with their accountants or tax advisers and find out they can deduct most of their furniture and other business upgrades. For more information on Section 179, click here.
The bottom line
Whether you’re considering a new-flat screen TV for your reception area, additional cabinets and counters, and/or more tables and chairs, it’s wise to consider financing as an option. Make sure to consult with your CPA or other trusted source when thinking about all of your options.
Professional Solutions Financial Services is always here to assist you as well. Feel free to contact one of our financial experts today about honest, fair and affordable equipment loans.