Purchasing assets such as machinery, motor vehicles and equipment are very expensive and would be the biggest outlay your business will make. It is very easy for a business owner to overlook the effect buying assets has on the cash flow due to the fact the purchase shows up in the balance sheet instead of the profit and loss statement.
The ways in which a business can purchase assets are: –
- Paying upfront with cash without using any form of finance. This would involve handing over large sums of cash in one hit, which is not advisable, and very few businesses would do this. The benefit to be gained from doing this is to save money on interest payments.
- Using external finance such as a chattel mortgage or leasing to fund the purchase rather than handing over cash. In the long term this is more expensive due to the interest charged but it avoids the need to hand over large sums of cash at once and will reduce the pressure on cash flow.
Once you have chosen the type of external finance you are going to use you will need to take the following into consideration:
- Can you afford to make the monthly payment? If you commit to making high loan payments, this could put pressure on your cash flow.
- Interest rate and fees. If the loan is a high interest one it could result in high monthly repayments that could not only put pressure on cash flow but also increase your business expenses. There can also be hidden fees that can dramatically increase the cost of the loan.
- Longer-term loans do have lower monthly repayments but they will cost more in interest payments. To determine the loan term you will need to calculate how much you can afford to pay each month.
- Required security on the loan.
It is critical to handle the purchase of any assets in the right way to minimise the effect on cash flow and business expenses. This is where a good finance broker is worth their weight in gold as they can find the right finance solution to suit your business.
How do you handle asset purchases in your business? Do you make use of an advisor? Is your cash flow put under strain due to asset purchases?
Would love to hear your thoughts!