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When buying business assets, is cash king?

When buying business assets, is cash king?

Australian businesses are overwhelmingly preferring to finance equipment purchases using their cash reserves. But is an overreliance on cash causing smaller businesses to stretch the life of their equipment beyond its effective life – and costing them efficiency and future growth?

Despite local and global economic challenges, most Australian businesses are recognising the importance of investing in assets to maintain business growth. According to the latest CommBank research, around two-thirds are planning to acquire additional equipment this financial year. 

While it’s encouraging to see this level of business confidence, it raises some questions around how businesses intend to finance their purchases. Surprisingly, even with so many financing options around, many businesses still rely on cash to buy assets. 

While buying equipment with cash reserves can make sense when interest rates are high, today’s low-rate environment means that business have more cost-effective financing options available – this opportunity is something that business really need to consider carefully.

Tapping into cash reserves

CommBank’s latest Equip survey of almost 1,000 Australian businesses reveals that cash remains dominant as the preferred finance source. 87% of firms who are looking to purchase equipment in FY20, say that they will fund at least some of their purchases with cash.

As a proportion of overall spend, using the businesses cash makes up 60% – with asset finance and business loans usage at 12% and 13% respectively.

This prompts the question whether these businesses can make better use of the cash they have available. While purchasing equipment with cash can be the simplest way, it ties up a valuable resource that companies could otherwise use as a buffer for financial setbacks, or to invest back in the business in other ways.

The benefits of having cash at hand can provide a business with greater flexibility to adapt and take advantage of new opportunities as they arise, and to withstand fluctuations in uncertain times. So instead of having money locked into a depreciating asset, business have it available as a safety net when they need it.

Stretching the life of assets

This reliance on cash may come with another downside: nearly one quarter of these businesses are using their equipment beyond its effective life. 

Stretching the life of assets has a direct impact on maintenance costs, which increase by as much 100% once a piece of equipment is more than five years old – from a median cost of $1,540 to $3,080 per month. For medium-sized businesses ($10m to $99.9m in turnover), this equates to a 67% increase in the cost of maintaining their equipment. Such increased costs can have a direct and ongoing impact on a company’s bottom line.

As well as being more cost-effective, reliable, up-to-date assets can help businesses run efficiently and safely. But with a lack of spare cash cited as the number-one reason holding a third of companies back from investing in new equipment, what other options exist for Australian businesses?

Exploring other options...

Lending Solutions that are specifically designed to finance equipment and vehicles can be an ideal solution for businesses who want to invest in up-to-date-assets. Surprisingly though, less than four in ten business use specific finance equipment at all. So by waiting to have cash on hand, they may be missing an opportunity to regularly update or put additional equipment to work in their business. 

Equipment finance enables business owners to pay for new vehicles and machinery in regular instalments – typically at a fixed interest rate. This makes it easier to plan out their business cash flow, without their budget being impacted by a lump sum purchase of a big-ticket item.   

Crucially, these financing arrangements can be more flexible than traditional bank loans as they can be structured around either fixed or floating rate arrangements as well as the specific working life of assets and business cash flow cycles. Depending on the type of finance, there may also be tax benefits if payments are considered to be business expenses. 

Talk to us

To find out more about CommBank’s Equipment Finance solutions, call 1800 ASSETS to access your local Australian based Asset Finance Specialists.

Things you should know Note on research: The CommBank Equip survey statistics used in this article are based on a survey of 905 businesses, conducted by ACA Research for CommBank between 30 August and 13 September 2019, entitled Equip: Issue 10 Asset Finance Thought Leadership Research. All statistics used are sourced from this research unless otherwise stated. This information is published solely for information purposes and has been prepared without considering your individual and business objectives, financial needs or objectives. It has not been independently verified and should not be relied upon as advice. You should therefore consider its appropriateness to your circumstances before acting on this information. You may also wish to seek independent advice. You should read and consider our Terms and Conditions available at (vanity link) before making a decision about our products. Applications for finance are subject to the Bank's eligibility and suitability criteria and normal credit approval processes. Credit provided by the Commonwealth Bank of Australia wholly and predominantly for business and commercial purposes only. Commonwealth Bank of Australia ABN 48 123 123 124 AFSL and Australian credit license 234945.