Is now a good time to buy equipment? Should I finance or pay cash?
As we approach the year’s end, many business owners are considering investing in their businesses by purchasing machinery, vehicles, or other equipment. Some businesses are able to upgrade to less labor-intensive equipment to help with staffing shortages or utilize new technologies to improve productivity.
Before deciding on the cash versus financing decision, talk to your CPA about tax benefits, such as bonus depreciation, relating to these types of investments. This can be especially advantageous if your business has had a good year and has excess cash on hand or an unused capital expenditures budget.
This is also a great conversation to have with your banker. When interest rates were low, the financing decision was not as impactful. Now, interest is a meaningful expense, and the costs and benefits of financing must be weighed against paying cash. It is important to recognize that paying cash is like earning a risk-free return equal to the interest rate you would have been paying. With Prime at 8.50%, paying cash makes a lot of sense if your business has excess liquidity. However, if cash is tight, or more importantly, if your cash on hand has another use, such as working capital to replenish inventories, then it may be better to finance even at these higher rates.
Before you meet, project out your cash needs over the next 12 months. This allows your banker to advise on what financing options would serve your business best or if now is a good time to put some cash to work for your business.
Originally published in Small Business Monthly's December issue of 2023 by Pete Zeiser, President - Chesterfield Commercial at Midwest BankCentre.