Today’s businesses are faced with a constant barrage of challenges, each requiring scarce resources. The notion that you can only spend a dollar once means you must juggle expenses to optimize your ROI, spending on those actions that generate the most value for your business. However, you can leverage your funds to get more bang for each dollar. While many companies rely on cash reserves and credit lines to fund projects and operations, there is an alternative financing solution that can provide significant benefits: equipment financing and other tools called leveraging your business in financial terminology. Equipment financing gives you the ability to acquire new equipment, technology, or software without having to pay for them all at once. In this post, we’ll explore the financial benefits of equipment financing by looking at how it works and how it fits into your overall growth strategy.
Leveraging your business
Leveraging involves using other people’s money so you can do more with less money. We all know about borrowing as a tool for leveraging your money. And, while it has its drawbacks, most businesses use borrowing for short-term shortfalls as well as a long-term method to accelerate their business. Leveraging your business can also be done without borrowing money and is the only option available to new businesses that don’t have the means to borrow money or don’t want the risk that comes with borrowing.
This type of leverage involves using other peoples’ stuff. For instance, renting versus buying is a great leverage tool. You can rent space, equipment, and even entire production facilities to reduce the need for cash and the associated risks. You can also outsource elements of your business operation, such as HR and payroll. This is especially valuable when you don’t have enough work to employ someone full-time. Maybe an example will help.
Let’s say you think you recognize an unmet consumer need for a new product. New product development, especially if it involves diversification, is inherently risky, as you can see in the Ansoff Matrix shown below. You can significantly reduce that risk by renting equipment and space. If the product doesn’t prove profitable, you simply return the rented space and equipment rather than face the enormous expense of paying back loans or recovering purchase costs.
You can reduce the risk further by using contract manufacturing. Contract manufacturing involves turning over your product design to a company able to produce the product for you. They produce the product so you can market it without investing in long-term equipment, facilities, hiring a workforce, training, etc. If the product shows promise, you can then make it or continue buying from the contract manufacturer. In finance, there are make versus buy equations that help you optimize your decision.
If the decision turns out to favor the make, financing the purchase of equipment is a great option for leveraging your business and, in the long run, is less expensive than renting. Equipment financing is flexible and efficient, allowing you to access funds when you need them most, without waiting for approval or spending time preparing documents for each loan request. Because the equipment purchased acts as collateral, equipment financing saves time and money, giving businesses like yours an edge over competitors who may not have access to this type of financing. In addition to being an effective way to finance growth, equipment financing can also be used as a tool to manage cash flow or reduce risk during periods of fluctuating demand, such as seasonal peaks or slowdowns, or during periods when additional resources are needed but cannot be readily acquired (e.g. due to regulatory requirements).
The financial advantage of equipment financing
Equipment financing can help you reduce upfront costs, increase cash flow, and reduce interest rates. Equipment financing also provides a longer payback period, which allows you to get the equipment you need without having to wait for the entire cost of it up front. This can be especially beneficial if you have large amounts of capital tied up in machinery or other assets that don’t generate revenue very quickly (or at all).
In addition to these benefits:
- Equipment financing can provide greater flexibility when making purchases because it allows businesses to buy what they need now rather than wait until they have enough cash on hand;
- It helps save time by eliminating lengthy application processes with banks or other lenders;
- It increases debit collection by providing documentation that shows how much money has been paid toward an account a feature not always available with traditional loans;
Why leveraging your business makes sense
Cash is king. In the world of finance, this saying is especially true. As a company’s most valuable asset, cash reserves provide a buffer against risk and enable you to make strategic investments that can help your business grow. They are also an indicator of financial resilience: if you have enough cash on hand to cover your expenses for at least three months (and ideally six), then you’re in good shape but if not, then it may be time to take action before things get worse!
The first step towards building up an adequate reserve is determining how much money flows into and out of your business each month through sales revenue and expenses like payroll costs or raw materials purchases. Once these numbers are known, it’s possible to create a forecast model showing cash flow over time to ensure you always have enough cash at any given time to pay expenses like rent and payroll on time.
This statement of cash flow is based on the forecast and historical trends. Using this statement, you can determine where gaps exist between projected income streams and projected expenditures to indicate where a shortfall might exist that requires leveraging your business. Alternatively, these gaps suggest areas for improvement such as increasing sales volume or decreasing operating costs through cost savings. Leveraging your business by using tools like those mentioned above or outsourcing nonessential tasks offsite where labor costs are cheaper than hiring full-time staff members locally here at headquarters.
“There are two main ways to increase your cash reserves: either by increasing sales revenue or reducing expenses. The first option is more straightforward and best in the long run. Of course, increasing revenue is easier said than done. Increasing revenue involves employing one or more marketing strategies such as advertising, public relations efforts, social media campaigns, or other similar activities that help spread the word about what you’re offering.
Leveraging improves flexibility
Financial flexibility is the ability to adjust your business strategy and operations to changing market conditions. It’s also the ability to adjust when there are changes in technology, regulations, or competition. Financial flexibility allows you to respond quickly when something unexpected happens like a sudden change in customer demand or an increase in raw material costs so that your company isn’t left behind by its competitors who have already adapted their operations accordingly. Financial flexibility is especially important if you’re looking for new opportunities or trying to manage risk effectively while keeping costs down at the same time
It can also help you avoid the temptation to take on more debt than you can handle, which could put your business at risk if interest rates rise or the economy slows down. Financial flexibility is especially important if you are looking for new opportunities to develop your business, for example, you can get logging equipment financing if you are engaged in logging, and you will already be ahead of those competitors who have not yet thought about it.
If you have a business that requires equipment, you may be tempted to use your own money to pay for the purchase as it reduces the cost of the equipment in the long run over financing the purchase. After all, borrowing from another source may make things more complicated or require additional fees or interest payments. However, this approach could end up costing you much more than if you had financed the equipment through a loan. In fact, by financing instead of paying cash upfront for new equipment purchases or upgrades (such as computers), businesses can save thousands – or even millions – of dollars over time!
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