The last thing you want to do is overcapitalise on new business equipment you don’t really need. That’s why it’s vital to do your due diligence and make a strong business case for any major component you’re thinking about acquiring. In short, you’ll want to make sure the equipment you’re buying will deliver a return on your investment.
First, identify how the new asset will directly contribute to achieving your business goals. Then compare its financing and usage costs against the extra revenue you believe it will bring in. If this is a positive number, you’re in good shape.
Next, assess the purchase price of the new equipment versus the cost of hiring it. If hiring costs will take a larger bite out of the revenue it will generate, then it may be time to make your purchase.
What about the extras?
When purchasing a major piece of equipment, you’ll probably have a long list of options and upgrades you can choose to splash out on. But be careful here. Decking out your new purchase with a full suite of options can substantially increase its purchase price and eat away at your return on investment.
The key is to consider the extras as part of your business case. Try to assign a monetary value to each option and assess that against its cost. That is, consider how much revenue each added extra will bring in versus how much it will add to the purchase price.
And if it’s possible to upgrade the equipment in stages, you might want to get started with the base model then add on upgrades as it proves its worth.
How can you finance it?
Paying cash for major components or equipment is generally not the best option. Even if you have the cash available to fund the purchase, most businesses tend to favour keeping that cash in reserve to protect against any cash-flow bottlenecks on the horizon. Equipment finance could be the answer.
Equipment loan
The interest you pay on an equipment loan, and the depreciation of the asset, tend to be tax deductible. And many lenders will consider the equipment itself as security for the loan, so you may not be required to pay an upfront deposit.
Lease agreement
This means that the equipment vendor essentially rents the equipment to you for a specific period. Depending on your business circumstances, you may be able to claim the lease payments as a tax deduction. You may also be able to make an offer to purchase the equipment at the end of the lease.
Have you considered end-of-life?
Your new equipment won’t last forever, so it’s important to plan for its end-of-life. Be aware of any balloon payments your finance provider may charge at the end of a lease, or hire purchase agreement and assess this against what its value will be as a fully depreciated asset. In other words, you don’t want to be left with an end-of-lease bill that is more than the actual used value of the equipment.
As long as you do the maths, financing a new equipment purchase can be a very cost-effective way to boost your revenue while not having to fork out a large capital outlay. And that’s a win-win. Give us a call anytime and we can always lend a helping hand.
Original post by Bank of Queensland