Whether you're new to the car care business or you
have an established facility, you'll eventually be faced with the
decision to either purchase new equipment outright or finance the
acquisition. This detailed look into the payment methods available
for equipment purchases reveals that, essentially, you have three
choices: cash, bank loan, or lease.
CASH
A cash purchase takes funds from operating cash flow
and retained profits. At first glance, a cash purchase may seem the
least costly, as there are no interest or finance charges. If other
factors are considered, however, a cash purchase can turn out to be
the most expensive way to acquire equipment. Cash used to pay for
new car wash equipment is in after-tax dollars. For a profitable business
paying federal, state and local taxes, the cost of a cash purchase
could be as much as double (depending on tax rates), since the dollars
used have already been taxed as much as 45 percent. In other words,
nearly $2 in revenue has to be earned in order to have one after-tax
dollar to pay for the equipment.
Of course, this does not apply to less profitable companies.
For them, other factors can make a cash purchase even more costly.
If profits are marginal, there are probably serious working-capital
and cash-flow concerns. Using limited cash surplus to buy equipment
can deplete working
capital to a dangerous level. Once cash is invested into machinery
it becomes an illiquid fixed asset. While there's equity value in
the equipment, it cannot be tapped for ongoing operating expenses.
In fact, the cash tied up in equipment equity could be that little
bit extra needed to carry the business through a slow period or even
a recession. Consequently, a cash purchase of any significance is
usually unwise unless substantial and permanent cash surpluses exist.
BANK LOAN
A bank loan preserves your cash, but uses up the bank
credit you have set aside for other needs, such as real estate or
other business investments. It's also sometimes difficult to get your
loan term to match the useful life of the equipment you're purchasing.
In other words, you could be making payments on your car wash equipment
for 20 years, when it's in need of replacement after 10.
In addition, banks will typically finance only 80 percent
of the amount you need and will not finance your soft costs, such
as delivery and installation, plumbing and electric. Slow processing,
high closing costs, cumbersome paperwork, and lack of payment flexibility
can be negatives associated with a bank loan. Also, keep in mind that
banks do not really understand your business. They are generalists,
which means they don't specialize in any particular market segment
or have established relationships with the major "players"
in your industry. Many car wash manufacturers require a hefty down
payment when you place your order and the bank must fund it. You are
then required to start making your loan payments sometimes months
before the equipment is delivered and generating income for you. A
bank loan may be better suited to your purchase of property or a construction
project to expand your business rather than an equipment purchase.
LEASE
A lease preserves both your cash and bank credit availability.
Independent finance and leasing companies can finance up to 100 percent
of the equipment cost, and all or most of your soft costs. Faster
processing, simple paperwork, and terms that match the useful life
of your equipment are all benefits you can realize with a lease. Direct
lenders also offer creative payment structures, such as deferred,
graduated, and seasonal payments.
Choosing the right company to provide your lease is
as important as choosing the right equipment for your business. When
selecting a leasing company, you will want to be sure that they have
a solid reputation in your industry and understand your business.
Many manufacturers and distributors will waive their down payments
when working with a leasing company that they have an established
relationship with. This means that you won't have to begin paying
for your equipment until it is delivered to you.
Remember that the decisions you make today will impact
the success of your business tomorrow. Choose wisely.
Anita Baron is business development manager of the
Car Care Division of Butler Capital (www.butlercapital.com), an independent
financing and leasing company. You can contact Anita at abaron@butlercapital.com.
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By
Anita Baron
