Starting a business is an adventure that requires a massive learning curve. According to Investopedia, 65% of entrepreneurs blame financial mismanagement for their business collapse. If your company doesn’t have enough cash on hand, you can’t apply it to any other areas of your business where that money could grow.
So, how do you make the most of the capital you do have to maximize your earning potential? Understanding the concept of the Time Value of Money can help you leverage equipment financing to your benefit. Watch the video, or read the article, to learn how to conserve cash, decrease risk, and invest your revenue to help your business grow.
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What Is the Time Value of Money?
Time Value of Money is an essential financial concept that explains the money you have on hand today is worth more than the same amount of money in the future. Why? Because the money you have today can be “put to work” to generate more revenue in the future.
You may already be familiar with compounding interest. The sooner a person invests their money, the more time they have to accumulate more. This could have an extraordinary impact on your business. By reinvesting your business’s cash into enhancements, you are unlocking the potential of compound interest.
Compounding is the eighth world wonder. He who understands it earns it. He who doesn’t pays it - Albert Einstein.
Businesses should consider the time value of money when making decisions about future investments. These might include:
- Offering new service offerings
- Acquiring new business equipment or facilities
- Marketing activities
- Establishing credit terms for the sale of your services.
How Can Equipment Financing Help My Business Capitalize on the Time Value of Money?
Now that you understand the time value of money, you can use it to operate a more successful business. Does your commercial truck or decorated apparel business need to add equipment? It might be time if you experience any of these 4 indicators.
Here are a few ways in which leveraging equipment financing for your business can help you reap the rewards of the time value of money.
Equipment Financing Helps You Maintain Cash Flow
While paying cash seems like the easiest solution, a cash purchase for a substantial piece of equipment could hamper your business’s ability to invest in other strategic upgrades or to cover emergencies. Rather than tying up all the money you have on hand, equipment financing could give your company the flexibility to use that cash in other areas of your business that can provide the conditions for growth.
Equipment financing helps conserve your savings by breaking down the purchase cost into affordable monthly payments. Your business acquires the equipment you need sooner and conserves your cash. You can then use your cash to reinvest into different areas of your business, such as:
- Overhead costs
- Additional inventory
Equipment Financing Helps Maintain Liquidity
No matter how great or well thought out your business plan is (or how you allocate your funds) things never go as planned.
According to US Bank Small Business Survey, 31% of business owners still feel like the United States is in a recession, making liquidity of your assets as important as it was in 2008.
Equipment financing allows your business to conserve cash. With enough cash on hand, your business has enough liquidity for daily operation costs, emergencies, and even opportunities.
- You don’t have to spend your hard-earned savings on one large purchase.
- Get your equipment sooner for a low monthly payment.
- Conserve your cash for when you need it the most.
- Conserve your Business’s Bank Lines
Equipment Financing Can Reduce Risks
If a business uses all its cash on the purchase, there can be a high level of risk involved. However, predictable monthly payments can spread the risk out over a long period, avoiding the risk of running out of funds at once.
Businesses that use equipment financing have more flexibility to react to market shifts because their capital isn’t tied up in one asset.
Compound Interest in Action
Suppose you have several options for investing money with various returns. Here’s an example:
At the end of the year, Charlie’s startup business generated $15,000 in profit after paying all salaries and expenses. They intend to run this small business for the next 30 years until retirement. Charlie considers two options:
- Option 1: Reinvest all $15,000 into growing the company.
- Option 2: Take out $10,000 as an end-of-year performance bonus and reinvest $5,000 into the company.
Charlie also believes that by reinvesting in certain business activities, they can reasonably earn 10% interest annually on their investment.
So how do the numbers play out?
With option 1, the interest Charlie perpetually receives off that initial $15,000 turns into $261,742 after 30 years, assuming they earn 10% on it each year and can continue making strategic decisions to grow their business!
Time is money, and the sooner you earn or save that money, the faster you can put it to work for you.
With option 2, the interest Charlie perpetually receives off the $5,000 invested becomes $87,248 in 30 years under the same conditions.
There are various unknown variables that could help Charlie’s business grow more or go in the other direction. But, the contrast is significant. In this simplified example, the $10,000 bonus Charlie took out in the infancy stages of the business ended up costing Charlie’s company $174,494!
Ready To Get Started? Talk With A Financing Consultant Today
The best part of understanding the time value of money is that you’re in the driver’s seat to make decisions that will help you as a business owner.
The point isn’t to hoard as many pennies as possible. Instead, use your cash-on-hand to make consistent, strategic investment decisions to improve the financial performance of your business.
Should you need help with financing a piece of new equipment for your business, a trusted equipment financing company is the perfect go-to partner to help you save more money to reinvest in your business growth.
Schedule a quick talk with an equipment financing expert at beaconfunding.com/talkwithus.