If you’ve decided you need to replace or upgrade a piece of equipment, the next consideration is whether to purchase it directly, to secure financing so your cash flow isn’t affected, or take out a lease.
Part 4 [In this blog series, you’ll discover the main consideration points related to equipment investments and your small business.]
You may have already determined that you are badly in need of an equipment replacement or upgrade, but lack the means to make it happen. This is when you’ll want to consider options such as equipment financing or leasing: they can help you secure the funds you need without strangling your cash stream, while still satisfying the necessary requirements for equipment-related tax deductions.
Leasing can be a great solution for businesses without the capital or credit to make a purchase, allowing you to preserve your cash while acquiring assets that will help you grow.
First, you’ll need to determine the minimum lease periods of any equipment under consideration. Consider your business and cash flow projections in relation to these minimum lease periods. If you purchase equipment with a minimum lease period of 3-5 years, you’ll need to be sure that you’re not paying for something you’ll want to replace after 2 years.
When to finance
You know that you need to invest in your business to help it succeed, but many equipment purchases are out of reach for smaller operators, for whom cash flow is the most critical concern. When paying out of pocket, you’ll have to weigh the expense against the possibility of improved efficiency from better equipment. Evaluate what type of ROI you can get from the investment.
For small businesses, financing is the best option for ambitious plans and large expenses. For large equipment purchases, the initial layout may represent a financial risk—but if it results in quicker turnaround and better service, impacting your everyday business for the better, it’s probably well worth the risk.
When considering longevity, a good rule of thumb is to pay up-front for items that won’t last long, like single computers and some kinds of IT equipment, while seeking financing or equipment leases for big-ticket, higher-risk equipment. This allows you to make the necessary upgrades that will help your business continue to blossom and thrive, without endangering the all-important cash stream. If you know you are making a solid purchase with a good warranty, this is an ideal situation for financing or leasing because you can make regular, non-intrusive payments and take the tax write-offs over time.