Some construction professionals may believe cash and credit provide different means to the same end; buying equipment, machinery and other assets for a company, as well as addressing additional expenses. It's important that business owners understand the similarities and differences of these two financial assets and the potential benefits and drawbacks of each.
This knowledge is especially vital when making major purchasing decisions, like a new piece of heavy equipment. Let's look at how cash and credit compare:
The most immediate benefit of using your cash reserves to purchase equipment and machinery is the simplicity of the transaction. Your business pays the equipment dealer and you receive the equipment. There's no lease or loan for your organization to enter into, and the new purchase is owned outright.
Of course, cash has some limitations that must be noted. It's a much more finite resource than credit. Very healthy businesses with strong revenue and profit statements can easily encounter occasional periods of time where available cash is limited. Companies that only use cash limit their ability to purchase major resources when they're needed, sometimes significantly.
Solely using cash can conflict with proactive planning of future purchases. This is one of the major ways to avoid delays and out-of-service equipment, which can disrupt operations and have a negative impact on revenue in terms of both consistency and volume. Relying solely on cash also makes it harder to take advantage of potential expansion. If a chance to grow operations presents itself and requires more equipment to be successful, a lack of cash on hand means a slower response time and the potential to completely miss out on the opportunity.
Using cash in this way means avoiding credit for the same purpose, and that reliance only on existing resources - despite the concerns previously outlined - can create a powerful peace of mind. While that attitude is understandable, it doesn't give enough consideration to the many positives and very few negatives of using credit in a responsible and organized manner.
Credit frequently involves some more requirements up front. Compared to situations where businesses have the necessary cash on hand, applying for a line of credit takes a longer amount of time. It also requires more work on the part of the company in terms of sharing financial statements and getting approval. Credit also involves interest payments, and frequently a down payment, as well. These additional factors involved in using credit mean it's not automatically the right choice for an organization looking to make a large purchase.
However, credit offers a number of advantages. For companies with solid financial standing, it's rarely an issue to secure credit for a large purchase. When working with a captive finance company, those advantages expand. Businesses can work with a provider that's intimately familiar with their industry and cooperatively select terms and conditions that meet the unique needs of the business. With a number of variables involved in securing financing for equipment, a captive finance company frequently gives businesses seeking credit the most agreeable terms.
Using credit creates more flexibility for organizations as well, expanding purchasing power by creating a complement to cash on hand. Many companies like to limit the use of cash to specific areas of operation, like payroll, rent and similar considerations.
A line of credit allows businesses to maintain the financial needs tied to those critical aspects of operation while leveraging the credit to make major purchases and create or maintain the capacity to make new purchases. Cash can instead be used to make the monthly payments associated with the line of credit and keep interest payments to a minimum.
Having either fixed or revolving credit at the business's disposal allows for more overall flexibility, a chance to readily respond to opportunities for growth and to proactively improve machinery and equipment.