How Asset and Equipment Financing Can Affect Your Cash Flow Management
Without money, a business can’t operate. Cash is king, they say. That’s why the most successful companies are those that have mastered the art of making more money than they’re spending. And how do you make sure that more cash moves into than out of your business? By monitoring cash inflows and outflows—a process known as cash flow management.
Aside from tracking financial health, cash flow management also allows a business to easily identify growth opportunities. Not only that, but a company can also spot potential financial problems. What does that mean for business owners? It’s keeping costs in check more effectively and better planning for future expenses.
The problem is that in a 2020 survey, 150 of the 300 small business respondents didn’t have a documented budget! No wonder around 20% of startups fail within just their first year of operation, according to Forbes.
But there’s hope. You can employ some strategies to keep cash flow positive. One of them is asset and equipment financing. What is it? And how does it affect cash flow management? Continue reading to learn more.
What is asset and equipment financing?
Let’s first understand what asset and equipment financing is.
Asset and equipment financing is a finance option business owners can use to grow their companies by acquiring much-needed assets or equipment. Businesses commonly use it to buy machinery, vehicles, and other capital assets.
Note that asset and equipment financing have several categories. It can be a loan that’s secured on the machinery or vehicle you purchase. It can also be a hire purchase agreement where a lender buys the equipment for you. You can use it, but you must pay it off in installments before you can have full ownership of it. There’s also the operating lease wherein a lender buys the asset for you. But to use it, you’ll have to rent it for an agreed period.
Obviously, there are a lot of things to think about when securing this finance option. Each of its categories has pros and cons. But fret not; you don’t have to do it alone. Brokers from reliable asset equipment finance solutions providers can pair you up with a lender and a product that best suits the unique needs of your business.
Asset and equipment financing’s impact on cash flow management
Now, how does asset and equipment financing affect cash flow management exactly?
There are several ways this finance option can help business owners manage their cash flow better, such as:
- Significantly less initial outlay: Think about it—purchasing machinery, vehicles, or any equipment in cash takes a significant blow to your working capital, right? With asset financing, on the other hand, the initial outlay is significantly less. Sometimes, you don’t even have to shell out any money upfront. You can get that new equipment to keep up with market demands. It allows you to meet customer expectations without experiencing cash flow issues should unforeseen expenses come up.
- Predictable monthly payments: So, instead of a huge initial outlay, you make smaller payments for the equipment you acquire each month. Those regular, fixed payments can help your company iron out cash flow to make it predictable and smooth. It’s easier to forecast expenses. Managing working capital also becomes less challenging. The result? It’s potentially more stable financial health for your business.
- Tax benefits: Did you know that asset financing offers potential tax benefits too? It may result in a cash expense posting or a combination of cash and non-cash expenses. Regardless, your taxable income could be reduced, which means less taxes to pay. With the highest corporate income tax rate recorded in the US for 2023, reaching 11.5%, this is welcoming news for sure.
Remember, whether or not asset and equipment financing is right for your current cash flow management setup depends on your unique circumstances. It’s important to ask yourself this important question: ‘Will paying cash put my business in peril if an unexpected expense knocks?’ If your answer is no, then paying in cash could still be your best bet.
The benefits of asset and equipment financing
Of course, not every company can afford to pay cash for new machinery, vehicles, or equipment. For many small businesses, it’s either they put off a critical purchase or turn to financing.
If you think a finance option is what you need now, then take heart in knowing that it also has benefits, including:
- Preserving cash reserves for other business needs: As previously mentioned, financing an asset purchase means low to no initial outlay. You’ll be able to preserve your company’s working capital. And because you don’t bear the entire cost of new machinery or vehicle upfront, you can allocate more of your working capital towards hiring talent, marketing, and other critical components of your business.
- Access to new equipment: Technology is rapidly evolving. Upgrades come out almost in the blink of an eye. It’s true for machinery, vehicles, and even just simple office equipment like computers. Older machines, of course, take a toll on business. In what way? Through loss of productivity.
Aside from productivity, security is also compromised when you keep on using outdated equipment, especially vehicles or industrial machinery. With 5,486 total fatal work-related injuries recorded in 2022 just in the US alone, business owners shouldn’t shrug safety concerns off. Not to mention, outdated equipment also contributes to decreased employee morale.
Yes, sometimes, large purchases are sometimes unavoidable. You must keep up with the competition. Asset and equipment financing can help you acquire the new technology you need without facing a cash flow crunch.
You see, asset and equipment financing may seem like a bad idea at first glance. But the truth is that it has its fair share of advantages. And these benefits all point to one thing: improving business efficiency and competitiveness while maintaining positive cash flow.
How to ensure asset and equipment financing works for you
We’ve learned in the previous section that equipping your business with state-of-the-art machinery and vehicles through asset and equipment financing can be a good thing. Still, you shouldn’t take your overall cash flow management for granted. Keep in mind that managing cash flow with these new acquisitions becomes extra tricky. Here’s what you can do:
- Proper budgeting and forecasting: You don’t know exactly what the future holds. No business does. How do you reduce that level of uncertainty? You can do it by budgeting and forecasting. Taking these steps helps you predict and deal with future cash surpluses and shortages. You can make informed financial decisions as a result. And that includes aligning financing options to your needs and goals.
- Negotiate with lenders: It’s always a good idea to explore multiple options when considering a loan. That’s a given. But should you grab the one with the most convenient terms immediately? Yes, but don’t be afraid to negotiate. See if you can still come up with a more favorable interest rate and loan term. Note that an understanding of your company’s strengths comes into play here. Highlight your current financial position. Bring up your good credit score too.
Asset and equipment financing can do wonders for businesses of all sizes. But that’s only true when you fully understand your company’s financial health prior to applying for one. Also, don’t make the mistake of not completely comprehending the financing arrangement’s terms and conditions upon signing that contract.
Takeaway
Healthy cash flow allows businesses to keep stakeholders, suppliers, and employees happy. It also tides companies over during emergencies or slow periods. Most importantly, healthy cash flow opens opportunities for growth and development.
So should you make or put off that critical equipment purchase knowing that it will take a toll on your cash flow? If it helps keep money flowing in, then why not? Consider financing options to acquire that asset. But don’t forget to fully understand your company’s financial health prior to opting for one. Come up with a financing plan that works for, not against, your business too!
