Which Way to Go, How Do You Know?
An Overview of Equipment Acquisition Options
No matter how you slice it, economics is a tedious component of any business. When acquiring equipment you’re faced with various options that leave you wondering what is best for your company.
Many questions must be answered such as: When is it best to pay cash? Who should I bank with? What is leasing? and Where is Uncle Guido’s number? They may begin to overwhelm you. While these are all viable options, there are pros and cons that must be considered for each.
Cash, an Interesting Topic
We all want it, and if we have it, we want to keep it. It’s considered the most inexpensive means of acquiring goods. But is it? Many of us believe that cash is king without ever thinking of the opportunity costs. In such a case the cost is not charged to you, but may be lost anyway.
Cash is among the strongest assets and can allow you to grow your business at a pace that you feel comfortable. It can also be viewed as a safe haven. In the concert production business, there is an absolute truth. Without cash, rainy days are far harder to weather.
Rather than tying up your hard earned cash into equipment that quickly loses value, consider investing in real estate, the stock market, or even, heaven forbid, advertising. These are a few investments that have proven to be successful over time.
However it does make sense to set some cash aside for other concerns like personnel and maintenance. Preserving your cash reserves is undoubtedly a wise business decision. Cash is king – just don’t let the crown lose its luster.
Banking and Lending
When it comes to banking relationships, we all hope that ours is stable and secure. We can expect very competitive rates and a free coffee cup. But let’s not kid ourselves. Bankers are still bankers set out to protect their portfolio by taking minimal risks.
Performance Audio is, without doubt, viewed by most loan officers as a high-risk business. The only time I hear about a sound or lighting company being courted by their bank is if I’m dealing with a very old and/or large company, or if Mr. Loan Officer is someone’s brother-in-law. “Kudos for them.”
Let’s say you do have a friendly banker and he or she is ready and willing to give you a line of credit. Perfect, you’ve achieved a very important goal…the use of someone else’s money. The first thought should be how to best use those funds. If you use the line up for equipment purchases, are you cutting off your nose in spite of your face?
I mean, how are you going to make it through tough times without that extra cash set aside. Last I checked, money doesn’t grow on trees. That valuable line of credit can be used to cover incidental costs such as sub-rentals, add on personnel, and other unforeseen emergencies.
The Lease Option
Equipment leasing has been a consideration for many years by sound and lighting professionals. With its convenient approach to lending, the leasing industry puts larger dollar equipment into the users hands nearly as fast as old Uncle Guido. However, leasing does have its own set of pros and cons, and if you’re not prepared, you could be displeased with the whole leasing experience.
With convenience comes cost. Leasing can be viewed as opportunity cost, but it is an expense to the buyer just the same. Risk is the primary factor in the cost of doing a lease. Many leases are written without the need of financial statements, so as to allow the smaller to mid-sized companies the same opportunity of acquiring large dollar items as the big boys.
Leasing costs can vary based on the credit profile of the applicant and current economic trends. Use good common sense when negotiating lease payments. If your leasing agent pulls up in his or her new Viper, you should worry!!!
The Tax Advantage
Certain tax advantages also come along with leasing. Your leasing agent should have adequate knowledge of the different leasing tax laws. But remember, they’re salespeople. Don’t rely on their advice alone. It’s your accountant that has to sit through the audit with you.
Choose wisely when selecting a lease company. There are many firms that process leases like bumpers on a production line. The faster they get them out, the better off they are.
It may benefit you to look for a company that has some working knowledge of your industry. A leasing agent who focuses on niche markets, often understands the politics and language of your industry.
And let’s not forget Uncle Guido, for those who have one. The biggest draw back when borrowing from family can be the payback arrangements. No one wants to burn bridges with family – or be thrown off of one for that matter.
Financing is a necessary evil we all have to deal with. Common sense has always proven to be the most reliable approach to borrowing. Know your options and seek out advocates you can trust. It’s your hard earned money. Make it work best for you.
Originally published in Live Sound International – March/April 2000 – Volume 9 Number 2