For many small businesses, taking the plunge to finance equipment is a big step. After all, when all is said and done, you’re assuming a long-term commitment. So let us ease your fears a little bit and mention two general truths about equipment financing:
1) Financing equipment is sometimes the only way to grow.
2) Oftentimes, financing equipment is immediately profitable.
Let’s talk about these one at a time:
Generally, the only way for a company to grow is to increase revenue. Often, this cannot be done without new equipment. A new vehicle on the road, a new office, updated machinery, etc. And, obviously, cash at hand is often not enough to buy this new equipment outright. So financing this new equipment is the only option.
And this leads us to #2- Many times; financing new equipment costs a company nothing (or close to nothing). And in some cases, it’s even profitable right from the beginning.
Lets use simple, fictional numbers here and say putting a new bus on the road for transport will bring in N300,000 more in revenue per month. The bus payment you financed, plus other expenses (driver, new tires, etc), are N200,000 per month. This leaves you a net profit of N100,000 per month.
In other words, if the equipment you finance brings you in more money than the equipment costs, it has become a profit center.
So many businesses in real estate developers and agencies have done this over the years. For example,, their entire message is if you buy their property for N1,000,000 per month for 5 years, and can rent it out for N1,500,000 per month, that is a positive cash flow of N500,000 per month (the property is generating you N500,000 per month income.) Even if you spend another N200,000 per month on maintenance, that’s still N300,000 per month income.
In other words, buying that property essentially costs you nothing, and instead makes money.
It’s the same with equipment financing. If the equipment will be generating you income, it could very well offset the payment (or most of it), and in some cases, even exceed it.
And even if the income doesn’t exceed the payment right away, it will once the equipment is paid off.
Say putting that new bus on the road costs you N300,000 per month like the above example, and it only makes N200,000 per month in revenue. This still isn’t bad because you’re really only paying N100,000 per month for a new bus (which will be paid off in a few years, and then turns into a pure profit center.)
So in the end, the way to look at equipment financing is that it’s a part of profitable growth, NOT as an expense.
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