What’s the interest rate? It’s like buying a new lawn mower and asking who manufactured the spark plug. Don’t get us wrong, the mower doesn’t run without it so the importance is obvious, but just how big of an impact does it have on the purchase decision? When acquiring new commercial equipment, interest rate is important…just not as important as many business owners make it.
The most important concept in finance is payment. That’s because the most important concept in your business is cash flow.
For many companies, each asset is revenue producing. Understanding the revenue impact each asset may bring is the single most important factor in evaluating a commercial equipment purchase. Whether bidding on bigger projects, hiring new staff, or a new focus driving additional sources of revenue, the opportunity cost of not having the asset working for your company often overwhelms any single part of the acquisition process.
Rental expense, downtime and maintenance costs create inconsistent cash flows, customer satisfaction issues and a generally challenging business model. Understanding the detail of the financial consequence your company is facing for each of these issues is critically important. Newer, more reliable equipment, in service improves consistency of cash flows and may lower overall expenses at a level far exceeding components of the finance structure.
In addition to downtime expenses, older assets often operate less efficiently. They may not possess the newest technology causing higher operating costs and a lower production rate. Employees that use less efficient equipment are often less satisfied with their job, leading to potentially high turnover costs and other management concerns. The real dollar expense of inefficiency is another factor that outweighs finance implications.
Payment Over Rate
“How low can we go?” It can be easy to be seduced by interest rate. Obtaining a supremely low interest rate might feel like a badge of honor of sorts. In reality though, while a good thing, it’s somewhat like winning the award for being the tallest short person. The most important concept in finance is payment. That’s because the most important concept in your business is cash flow. Your bank may offer a great 6.5% rate, but the finance term is 48 months. An equipment finance company may offer 9%, but financed over 72 months. Lower payment allows you to reinvest in your business…even monthly…in areas that provide a greater return on investment than investing precious cash flow in a depreciating asset.