As a business owner myself, I know there are many costs associated with running your own business. Depending on the type of business you run, you may need office technology such as a computer, a printer, and an office telephone. Or you may need machine tools. Or construction equipment. Or a truck. All of these expenses add up, in addition to commercial rent, payroll, business license, software, and marketing. One of the biggest mistakes I see business owners make is to use cash for all of these purchases. Unless you are a government or nonprofit agency trying to keep a specific budget in tact for the next fiscal year, you should always finance depreciating assets, and save your cash for the intangible items, as mentioned before, inventory, payroll, and marketing. The logic behind using cash for all of the purchases stems back to how we have been told to handle our personal finances. Payments are bad! What good is having something that you can’t own free and clear? In business, this is a little different and I will explain why.
I get many calls from business owners who are desperately looking for ways to get some quick capital because they’ve spent all of their cash on equipment for their business, now they need to make payroll. They are wondering if they can leverage some of the equity of the equipment to give them an infusion of cash. Sometimes they can, and sometimes they can’t. It depends on the type and age of equipment. And if they can leverage the equity, it’s going to be at a rate that is higher than if they would have financed it new. I always compare it to buying a new car versus a used car. You can get a new car at .09% APR, but on a used car it’s normally not going to be less than 2.99%. The same applies to equipment financing.
The other option is for the business owner to get a working capital loan. We offer them here at Zena Financial, however I always caution business owners to make sure they only seek this type of loan if they know they will be making money right away. These types of loans can vary from friendly terms to very aggressive terms. Many of these have required daily payments that auto deduct from your business checking account. The amount you are offered is dependent on the deposits in your business bank statements. Generally when I see businesses use these types of loans, I know they are in quite a desperate situation. These loans do have their purpose, but again I caution, make sure you will make money immediately with whatever you are going to purchase with the money from these loans. Remember, equipment financing for assets, and business loans for intangibles. Never take a working capital loan in order to purchase equipment!
Finally, there are some tax benefits to be considered if you should decide to finance your business equipment needs. If you take a business loan, you may deduct only the interest you paid. On equipment financing, depending on if you choose a loan or a lease, you can deduct much more. If you choose a lease, you may be able to deduct the monthly payments, year over year for the term of the lease. If you choose a loan, you may deduct the full amount of the purchase, and still have the benefit of making affordable monthly payments over the term of the loan. To learn more about deductions and tax benefits, please consult your CPA and review Section 179.
- Equipment needed to run or grow your business
- Leases and loans
- Tax benefits- check with your CPA
Are you ready to start claiming those tax benefits?