Preserving Liquidity or Paying Cash? A Better Framework for Equipment Investment
A company with enough cash to purchase equipment outright may appear to have a straightforward decision. Avoid financing, eliminate interest expense and own the asset from day one.
Some don’t realize that the ability to pay cash does not necessarily mean doing so is the best use of capital.
At Fidelity Capital, we have worked with businesses across a range of industries since 1999, helping companies acquire the equipment, software and technology they need to operate and grow. Over that time, one principle has remained relevant across economic cycles: equipment acquisition is ultimately a capital-allocation decision.
For CFOs and business owners, the question isn’t simply, “Can we afford to pay cash?” It is also, “Where can this capital create the most value for the business?”
The Real Cost of Using Cash
Consider a company planning a $500,000 equipment purchase. Paying cash eliminates the financing expense, but it also removes $500,000 from the company’s available liquidity.
That capital can no longer be used to hire employees, purchase inventory, fund an expansion, manage an unexpected slowdown or pursue another opportunity.
This is the concept of opportunity cost, and it is an important part of evaluating equipment investments.
A company expecting few additional capital needs and maintaining substantial cash reserves may determine that an outright purchase makes sense. A rapidly growing business, on the other hand, may place a much higher value on keeping that same capital available.
As Fidelity Capital leader Ed Pope puts it:
“The conversation shouldn’t end with whether a company has the cash to buy the equipment. We want to understand what else that cash needs to accomplish for the business.”
Liquidity Has Strategic Value
Cash reserves serve more than one purpose.
Working capital helps businesses absorb fluctuations in revenue and expenses, but liquidity also gives management the ability to act when opportunities emerge. A manufacturer may receive an unexpectedly large order. A contractor may win a project requiring additional machinery. A growing company may need to add employees or increase inventory before collecting revenue from new customers.
Companies that commit significant amounts of cash to equipment can reduce their ability to respond to those situations.
Financing can change that equation. Rather than absorbing the entire equipment cost upfront, a business can distribute payments over time while putting the asset to work immediately.
Fidelity Capital’s equipment financing programs, for example, can finance new or used equipment with terms that can extend from 12 to 60 months. The company also finances technology projects that can include hardware, software, professional services, shipping and implementation costs.
The objective isn’t simply to avoid using cash. It is to determine whether preserving that cash creates greater financial value elsewhere in the organization.
Match the Financing Strategy to the Asset
The decision also depends on what the company is purchasing.
Long-lived production machinery presents a different financial profile than technology that may need to be upgraded relatively quickly. Revenue-generating equipment may justify a different approach from an asset purchased primarily to replace aging infrastructure.
Finance leaders should consider several factors together: expected useful life, anticipated return, maintenance requirements, obsolescence risk, financing cost and the company’s cash-flow outlook.
Ideally, the financing structure should complement the economic role of the asset.
“If equipment is expected to generate value over several years, there can be a strong rationale for paying for that asset over time rather than absorbing the entire cost on day one,” Pope says.
There Is No Universal Answer
Paying cash is not inherently better than financing, and financing is not inherently better than paying cash.
A company with significant liquidity, limited alternative uses for its capital and a preference to minimize financing expenses may reasonably choose cash. Another business facing rapid growth, seasonal cash flows or multiple investment opportunities may reach the opposite conclusion.
After more than 25 years in equipment finance, Fidelity Capital’s role is not simply to provide funding. It is to help businesses evaluate financing structures in the context of what they are trying to accomplish. Which is ultimately the more useful way to approach an equipment purchase.
Before asking whether the business can pay cash, finance leaders should consider a broader question:
What is the most productive use of the company’s capital?
Ready to Explore Your Financing Options?
If your business is planning an equipment purchase or evaluating financing options, Fidelity Capital can help you explore a structure that fits your needs.
Get Prequalified: Complete our simple online prequalification form to see what financing options may be available to your business.
Phone: (949) 502-5900 | Email: info@fidelitycapitalonline.com
Disclaimer: This article is provided for general informational and educational purposes only. It may reference or incorporate information reported by third-party news organizations, financial publications, industry sources, and other publicly available sources. Fidelity Capital Partners, LLC does not independently verify all third-party information referenced, and such information may be incomplete, subject to revision, or change over time. Any analysis or commentary provided by Fidelity Capital Partners, LLC reflects our interpretation of the information available at the time of publication, including its potential relevance to equipment financing, leasing, capital planning, and related business decisions. Nothing in this article constitutes financial, legal, tax, investment, or other professional advice, nor does it constitute an offer or commitment to provide financing.
