Financing business equipment while keeping cash available
Should you pay cash or finance that new ute or machine? Some practical things to weigh up before you decide.
By Moss McEwen
2 min read
When the oven at Cockles Café gave up during a busy weekend, I had two choices: pay for a new one outright, or finance it. It's a decision every business owner faces sooner or later — whether it's a coffee machine, a new ute, a trailer or a piece of machinery.
There's no one right answer. But there are some useful questions to ask.
Why some businesses choose to finance
Paying cash means no interest and no repayments. But it also means that money is no longer available for anything else. Some businesses prefer to finance equipment so they can:
- Keep a cash buffer for wages, stock, suppliers and unexpected costs
- Spread the cost of the asset over the period they use it
- Get the equipment now, rather than waiting until they've saved enough
- Keep cash available for other opportunities
Others prefer to avoid debt and pay outright. Both approaches can make sense depending on your business.
Questions to ask before you decide
- Can my cash flow comfortably handle the repayments — including in a quieter month or season?
- How long will I use this asset? It's usually sensible for the finance term to sit within the asset's useful life.
- What's the total cost? Look beyond the repayment amount to interest, fees and any balloon payment.
- What happens at the end? If there's a balloon or residual, how will you pay it — refinance, sell or pay out?
- What security is involved? Usually the asset itself, but sometimes more.
Understanding balloon payments
A balloon (or residual) is a lump sum due at the end of the finance term. It can reduce your regular repayments, but it means a larger amount is due at the end, and you'll usually pay more interest overall. It can suit some situations, but it's important to plan for it.
What about tax?
How you finance equipment can affect your tax position. I don't provide tax advice, and I don't recommend a structure just because of tax. Speak with your accountant about the tax side, and I'll help you understand the finance options.
Getting the timing right
If you're buying from a dealer, talk to me before you sign. That way we can understand your options, what the lender will need (such as an invoice and your business details) and how long approval might take — so you're not left waiting with a broken machine.
General information only. This article doesn't take into account your objectives, financial situation or needs. Lender criteria change and all finance is subject to approval. Speak with me about your situation, and with your accountant or financial adviser for tax or investment advice.
Moss McEwen
Mortgage and finance broker at Bay Finance Co, based on the Fleurieu and helping clients across Adelaide and Australia. Former café owner, chef and small business operator. More about Moss
