How We Evaluate Financing Equipment To Grow A Larger Company
Let’s talk about financing…
Everyone has their own opinion on financing. Some people think it’s a good idea, while others think it’s not. There are so many questions around financing… When is financing a good option? What should you finance? What is a good interest rate? When should you think about paying off the loan? The questions go on and on.
My opinion is that financing is out there to alleviate the bottleneck of growing your business.
Let’s say you need a new mower and the mower you’re looking at costs $10,000. You can finance that mower at a 0% interest rate for 42 months, which would make your monthly payment less than $250. That mower that you are paying $250 a month for should now be able to bring in $2,500 a week in revenue since it is far more efficient than your previous mower. That would mean in an average month you’d be bringing in $10,000 on a $250 investment.
Now you might be thinking, why would I finance when I have the $10,000 in the bank? My answer is why wouldn’t you grow your business and create more cash flow instead of draining your account. You have no idea what the season might bring, you may need that $10,000 for repairs, and everyday supplies and expenses. There is no reason to drain your account, especially for a 0% loan. That loan costs you nothing. You are not paying anything more than the cost of the mower, so there is no significant savings to paying cash up front. I rather have the money in the bank for other potential opportunities to create more income as well as an emergency fund for anything unexpected.
There are other positives to a loan. When you take on a loan, you begin building credit, particularly building business credit is a major positive. Building credit will help you in the future when you want to expand your business further.
In my mind any loan with 0% to 4% interest is a decent rate. I would consider financing anything within those rates because I know I will get a greater return on my investment. I am all about leveraging money to make money. It’s the thought process of “what can I do with the cash I’m not spending.” That being said, that doesn’t always mean spend it in a different manner, it could mean keep it as an emergency fund.
What about paying off a loan, when is it a good time to do that? Let’s use that first example with the $10,000 mower for 0%, there is no urgency to pay that off. With 0% loans the urgency is completely removed. Wait until you have $20,000, $30,000, or $40,000 in the bank then pay it off. Use the money you didn’t spend on the mower to grow your business by hiring someone, or marketing. Figure out a way for your money to make you more money. You want to keep your cash working for you. There is nothing wrong with leveraging business debt if you’re smart about it.
Here’s where people get into trouble… Financing can be an amazing tool, but you can’t let yourself get in over your head. Don’t be that person with 7 or 8 payments you need to make every month because what happens when you break your leg? Can you still make those payments? The cash in your account will only take you so far, so you don’t want to take on so many payments that you are instantly in trouble if something happens. Just because something can be financed doesn’t mean it should be. Think about what you NEED for your business to grow. You don’t need everything all at once, only take on what you can handle.
There are also situations where financing is not a good option. When I was purchasing my plow I could have financed the $7,500, but it would have been at an 8% interest rate. Do you know how much money I would be throwing away with that high of an interest rate? By the time I was done paying off the plow, I probably could have bought at least half of another plow. So there is a line where financing is no longer a good option. When that’s the case, if you can pay cash, pay cash and if you can’t afford it, don’t buy it.
My goal is not to get you to run out and finance everything under the sun. My goal is to encourage you to not be afraid to finance equipment for your business. I am a firm believer of being personally debt free, but I think it takes money to make money, so don’t let the fear of financing stop you from growing your business.
