JLG Industries, Inc.
World-leading access equipment manufacturer
____
McConnellsburg, PA
It’s time again - time for your business to purchase additional equipment. You’ve got the need, you’ve decided on the right product(s) and you’ve even got the cash. Now for the big question: do you pay upfront or finance?
For some, the answer is easy – if you’ve got the cash, pay in cash and save financing charges. Simple, right? Not necessarily. When it comes to giving up your hard-earned cash vs. financing new units for your fleet, the answer isn’t as simple as you might think.
The Value of Cash Depends on How (and When) You Use It
While the cost of using financing often dominates the cash-or-financing debate, it’s worth your time to look at the larger value equation. The cost of financing is an important part of that calculation, but it’s still just a part.
Let’s also look at the cost of using cash.
Cash has a shelf life, a best-if-used-by date. The worth of a dollar today is very likely greater than the worth of that same dollar in five years, making an upfront cash investment in equipment more expensive than it looks on paper. And because equipment depreciates, you’ll have 100% equity in equipment that may be worth 50% or less of what it cost in five years.
But what if you’d financed the equipment? You could pay for what you use of the asset, instead of the entire thing, freeing the rest of the money – which has more value now than it probably will later – for reinvestment in your business. But even if you’re paying to own the equipment, you’ll still be paying with dollars that don’t have as much value as they do right now.
There’s also opportunity cost to consider when paying upfront. You can spend cash only once which could potentially limit your options down the line should a good investment opportunity present itself. The money you invest in equipment now won’t be available to be invested in inventory. Or salaries. Or R&D. Or more equipment. Or to address competitive actions in your market. Or anything else that could help your business grow.
You can spend cash only once which could potentially limit your options down the line should a good investment opportunity present itself.
One final piece of the puzzle to consider is your business credit rating. Financing equipment may be a good long-term strategy to building or improving the credit worthiness of your business. Maintaining a consistent history of a healthy credit rating is key to any successful business – especially in tough economic conditions such as the downturn of 2008.
By all means, consider the interest you’ll pay to finance equipment into your decision, but don’t forget the upfront payment tradeoffs that can lead to cash flow issues and missed opportunities. Everything considered, financing can be a great bargain and a versatile tool for getting more from your budget.
Want to stay up to date with industry news and trends similar to this? Make sure you subscribe below to receive monthly updates from Direct Access with newly posted content, so you never miss important information.
Want to stay up to date with industry news and trends similar to this? Make sure you subscribe below to receive monthly updates from Direct Access with newly posted content so you never miss important information.