A CANDID DISCUSSION OF CASH vs. CREDIT

Whether you are starting a new company, expanding an existing facility, or simply acquiring new technology, the method used to acquire assets can have a profound impact on your business. The three most common methods of asset acquisition are paying cash, bank loans and leasing. Although purchasing for cash is universally regarded as the least expensive choice, you should carefully consider other options and the overall costs and effect on your business before you reach for that checkbook. It is safe to say that most businesses intend to grow in strength and scope and that those objectives generally guide business decisions and define the term ‘success’. It is commonly accepted within the financial community that the most prevalent reasons for business failure are insufficient capitalization and the improper management of cash flow. If we accept those premises, paying cash for capital asset acquisitions may well have an adverse effect on a businesses ability to succeed. Conversely, financing in general, can be used as a very effective management tool and enhance chances for success. According to the U.S. Department of Commerce, American businesses acquired approximately $580 billion in capital assets during 1997 and approximately $180 billion were leased. Furthermore, the Equipment Leasing Association of America reports that over 80% of U.S. businesses lease some or all or their capital assets.

The basic assumption that CFOs and business owners make is that benefit is derived from the use rather than the ownership of assets. Therefore, available or excess cash is spent on things which are not traditionally financed such as sales, marketing and personnel, while financing and increasingly leasing is used to acquire depreciable assets such as equipment. An important factor to consider in financing asset acquisitions is the potential effect on your business’ ability to borrow in the future. Small business owners are sometimes unaware of the potential consequences. Most creditors and especially banks will establish a limit on the amount of credit they are willing to extend. This is simply a good and prudent business practice. The major elements used to make this evaluation are cash flow, credit habits, earnings and the general financial condition of the business under review. Many experienced business owners and managers feel equipment should be paid for as it produces revenue or saves costs.

The age old adage was never truer "CASH IS KING".