Delaying major equipment purchases can be costly, but so can using cash. Increase your cash flow by financing major equipment purchases.
A Common Dilemma…
Consider an all-too-common example: David’s business is growing. As a growing business he’s consistently booked, and it is not unusual for all of his equipment to be out on jobs. He knows that if he receives another lead he may have to refer them to another company or turn them away.
He feels he is losing business to competitors who can immediately address his customers’ needs. He’s considering whether he should wait another 6 months until he can save up enough cash to buy the equipment outright, or find a way to acquire the equipment now.
The cost of the new equipment he is considering is
$50,000, including a new van.
When growing a business, increasing your service capacity is a logical next step. If David purchases this
equipment, he projects this will allow him to complete 5-8 more jobs per month. With an average invoice
amount of $2,500, that’s an extra $20,000 per month in gross profit.
David needs to determine what option is best for his business. He has a few choices available. He can rent equipment, save up cash, pay with cash reserves, or choose to finance the purchase.
Choosing the Best Option
Renting the equipment offers a short-term solution that immediately resolves David’s concerns with helping customers, but can be costly over time. Renting equipment can easily cost $1,000 to $2,000 per month, excluding the vehicle. Adding a vehicle can easily bring costs up to $5,000 to $6,000 per month. At the end of the rental term, David will not own the equipment and will need to return it. This is a costly, short-term solution to David’s problem.
If David chooses to wait and save up the cash, he will not receive the increased monthly revenue, as he will be
unable to provide service to additional customers until the equipment has been purchased.
David may also consider paying for the new equipment with cash he has already accrued. Paying cash for major purchases may be the right decision in some situations. However, most financial advisors recommend against spending your cash on capital expenditures. Business owners who choose to spread out the cost of capital purchases over time enjoy the benefits and flexibility that cash on hand offers. Financing the purchase enables David to sustain a healthy cash flow, which provides for a more agile business that can quickly respond to opportunities and more easily cover costs that cannot or should not be financed.
Next, David can consider financing the purchase. Let’s estimate that David’s finance payments are $1,000 per month. This means that David’s business has gained an increase in monthly revenue of up to $19,000, creating an annual revenue increase of up to $228,000.
David can use his increased revenue to generate additional sales, advertise, purchase consumables, or re-invest in his business.
Out of all of these options, financing offers David the most flexible, cost effective solution with the greatest immediate increase in his revenue. This can give him a competitive advantage and ensure that he quickly meets his customers’ needs, while protecting his existing cash flow. Financing has also increased the value of David’s
business. The revenue-generating equipment added to his business is not only able to be counted as assets but
financing it allowed David’s annual revenue to increase by $228,000 while retaining his cash on hand.
Differences in Financing
Once David has decided to utilize the benefits of financing, he needs to decide what type of financing is best for his business. Financing options include credit cards, traditional loans or lines of credit through local banks, and commercial lenders, such as Aztec Financial.
Placing capital expenditures on a credit card is fast, but offers very little flexibility, and is subject to the restrictive balances of the credit card. Additionally, rates can be very high, and capital expenditures over-extend your available credit balances that could be used for emergencies or daily, smaller expenses.
Purchasing capital expenditures using a line of credit from a local financial institution has its own set of risks. Not only does this reduce your business’ buying power, but these loans have variable rates which can increase during times of economic shift. Lines of
credit are generally better suited for smaller, shortterm operating expenditures, such as advertising, payroll, and consumables. Additionally, many bank loans place a blanket lien on your business’ assets and often your personal assets. According to financial advisors, associating your personal assets with a business purchase increases the risk of liability to your personal assets, through a process called “piercing the corporate veil.” This type of financing structure is not recommended for business use.
Partnering with Aztec Financial
Financing with Aztec Financial provides flexibility for business owners, giving them the ability to respond quickly to fluid opportunities. By keeping his cash available, rather than tied up in equipment, David can respond to weather events, openings in the market, and other opportunities that arise with little to no warning.
All of the financing structures offered by Aztec Financial help to reduce the risk of personal liability by keeping the corporate veil intact. Financing remains under the business entity, which protects your personal borrowing power.
David may also choose to participate in Aztec Financial’s Equipment Credit Line Program, providing him with quick and easy access to capital when he needs it, while maintaining a healthy cash flow. Noticeably different than a line of credit at a local bank, Aztec’s Equipment Credit Line Program is structured with fixed pricing, and provides you with the flexibility to choose the most tax efficient structure with each draw. The Program costs nothing to set up, speeds up the approval processes and reduces fees associated with financing.
In addition to the increased monthly revenue, David can expect greater flexibility when filing his taxes. Aztec Financial provides lease and loan structures, which will allow his accountant to choose the most tax-efficient structure for his business needs.
Payoff and Retirement
Like most business owners, David does not plan to work forever. Someday he would like to retire. This may mean he needs to pay off his outstanding debt in order to sell his business or to settle these contracts with the proceeds from the sale.
In the event of an early payoff, most finance companies would ask David to pay the full purchase price of the equipment, plus finance charges, even if he pays off earlier than expected. Financing with Aztec Financial enables David to pay off his lease or loan early, without having to pay the full price plus finance charges.
David also knows that paying off his remaining debt will reduce his profits – either by capturing funds from the proceeds of the sale or by using a portion of his cash reserves. Fortunately, Aztec Financial has a unique option for David, specifically designed to help him retain his cash during the sale of his business. All leases and loans with Aztec Financial are assumable. This means that the financing contract can be transferred to another business, which will then take over the monthly payments, allowing David to retain his profits from the sale.
While every business is different, almost everyone can benefit from financing at some point in the lifetime of their company. Whether David’s goal is increasing monthly revenue, maintaining cash on hand, or spreading out the cost of a purchase over time – Aztec Financial has financing options that can help.
In David’s case, financing is a clear option that provides him with the ability to immediately assist new customers, retain working capital, and keep a healthy cash flow. Financing is a powerful business tool that enables professionals to grow their business while holding on to their most valuable asset – cash. Contact
Aztec Financial today to learn how financing can benefit your business.