Equipment Financing as a Profit Center

By | January 8, 2008

I know that I’ve alluded to today’s subject here in previous posts, but this time, I’d like to devote an entire post to it, as it is important.

Tangible equipment for general business use

For many small businesses, taking the plunge to finance equipment is a big step. After all, when all is said and done, you’re assuming a long-term commitment. So I want to ease your fears a little bit and mention two general truths about equipment financing:

1) Financing equipment is sometimes the only way to grow.

2) Oftentimes, financing equipment is immediately profitable.

Let’s talk about these one at a time:

Generally, the only way for a company to grow is to increase revenue. Often, this cannot be done without new equipment. A new truck on the road, a new office, updated machinery, etc. And, obviously, cash reserves are often not enough to buy this new equipment outright. So financing this new equipment is the only option.

And this leads us to #2- Many times; financing new equipment costs a company nothing (or close to nothing). And in some cases, it’s even profitable right from the beginning.

Lets use simple, fictional numbers here and say putting a new truck on the road will bring in $1000 more in revenue per month. The truck payment you financed, plus other expenses (driver, new tires, etc), are $900 per month. This leaves you a net profit of $100 per month.

In other words, if the equipment you finance brings you in more money than the equipment costs, it has become a profit center.

You may or may not have heard of Carlton Sheets, he does late night infomercials for a Real Estate course. Essentially, his entire message is if you buy a property for $1000 per month, and can rent it out for $1,500 per month, that is a positive cash flow of $500 per month (the property is generating you $500 per month income.) Even if you spend another $200 per month on maintenance, that’s still $300 per month income.

In other words, buying that property essentially costs you nothing, and instead makes money.

It’s the same with equipment financing. If the equipment will be generating you income, it could very well offset the payment (or most of it), and in some cases, even exceed it.

And even if the income doesn’t exceed the payment right away, it will once the equipment is paid off.

Say putting that new truck on the road costs you $900 per month like the above example, and it only makes $800 per month in revenue. This still isn’t bad because you’re really only paying $100 per month for a new truck (which will be paid off in a few years, and then turns into a pure profit center.)

So in the end, the way to look at equipment financing is that it’s a part of profitable growth, NOT as an expense.