What Are the Range of Options for Equipment Acquisition?

Cash Payments

This option assumes that there is enough cash available.

Advantages

• It’s simple and quick.

• Everybody accepts cash

• Cash purchases minimize paperwork and middlemen and may help reduce purchase price.


Disadvantages

• It’s generally not a good use of funds.


In today’s investment market, you can often obtain a yield on your money in excess of the interest charged for financing the equipment purchase. The only rationale for paying cash for the purchase is if your funds are in a low-paying account (e.g., a passbook savings account yielding 3%) whose yield is less than the interest on a loan or lease. In that case, taking the funds from a low-yield account and losing the 3% interest in order to avoid paying 9% or 10% is a sound financial decision. Of course, having significant funds in a 3% account is not wise cash management.

Financed Purchase

In this method of purchase, a lender provides funds for the purchase and generally obtains some form of lien or other encumbrance on the equipment until the funds have been repaid.

Advantages

• It does not deplete cash flow. (Usually a 10% to 20% down payment of the total purchase price is required. (In many cases, the income generated by the equipment can exceed the payments.)


• Funds not expended for a cash purchase can possibly earn a higher-income yield than the interest rate of the loan. Disadvantages


• Interest rates may be high.


• The down payment may be high.


• The equipment is encumbered by a third party (unless the funds are borrowed from a source other than a financial institution