Since interest rates are so low right now, most small and medium-sized businesses finance their business assets instead of paying cash. Some of these assets are cars, trucks, buildings, and machines. As technology gets better, work loads get harder, and the taxation life of assets gets shorter, these assets are being turned over every 4 to 5 years more often.
So why not just pay in cash!! Our business has had a great year, we have a lot of cash on hand, and we might as well just buy the asset outright.
Well, this might be true, but what will happen if sales slow down next year and there aren't enough funds to pay for business costs and overhead? Financing becomes a valuable part of any business at this point, and here are some of the benefits of getting it.
- Use a specific type of financing, like, Hire Purchase, or Finance Lease. With a Chattel Mortgage, the customer owns the asset from day one and can claim GST up front as well as interest and depreciation over the life of the loan. Hire-purchase means renting something now with the option to buy it later. Claim interest and loss of value over the loan's term. Finance lease: The finance company buys the asset and gives you full use of it in exchange for regular payments. At the end of the term, the finance company gets rid of the asset. (Always check with your accountant to see which of these products is best for you)
- Set up your payments so that your business can keep getting cash. This can be done by choosing terms from 1 to 5 years with or without balloon/residual payments. These final payments have to follow ATO rules and can be used for the products listed above.
- Build good credit with lenders so you can get more money in the future to help your business grow and move faster than your competitors
- Keep up with the latest technology and stay ahead of your competitors by updating your asset more often. If you were using your cash reserves, this would be a huge drain on them.
- Lock in a fixed interest rate for up to five years, depending on the asset being financed. These rates change, but at the moment, they are about 7.5 percent fixed. This depends on what is being financed and how long the loan is for.
These are just some of the most common reasons why people choose to finance instead of pay cash. Since every business is different, some of these may not apply to yours, but overall, you should think about these things when you buy your new business asset.
