Is Cash Still king?
I like to think of it a little bit like a game of Chess. That is – protect the King at all costs but in addition to that, grow the Kings domain, remembering once the King has gone – It’s game over.
Relating that back to business and growth and purchasing equipment when required.
The question remains – Pay cash pay less? OR borrow the money and keep the cash in the bank?
Let’s look at a basic example say purchasing a small excavator for $80,000
You’ve worked hard and put money away and have the available funds in the bank.
You make the purchase and spend the $80k. That $80k now is tied up in a depreciating asset. Let’s say that Excavator after 5 years has depreciated to $30,000. Essentially you’ve turned your $80k into $30K
Yes you have the ability to re-save money again, however you’ll take time to build those cash reserves back to $80K. Generally speaking it won’t be instantaneous.
What’s the alternative?
Borrow the funds – Let’s say you borrow $80k at 8.99% on a 5-year term with a 30% balloon. Your payments are circa $1,340 per month x 60 months = $80,400.
You have spent (over 5 years) essentially the same amount of money – roughly $80K
What about the balloon I hear you say – Well you trade that machine in or sell it privately or though consignment and pay the residual amount out of it to clear the equipment loan. You’ve still only spent essentially $80K and you still have your Original $80,000 in the bank. (Or invested in something)
The interest, the depreciation and running cost are still all claimable costs when you do your return, depending on your business structure.
The essential take-home from this basic exercise is that you still have your $80,000 CASH in the bank.
Is cash King? – I think so.
As always there is a disclaimer. This is not financial advice. Your personal or business situation has not been considered when presenting this general information and we suggest to always seek advice from a suitable adviser and or tax professional before making the decision on any financial product.
