Is it better to pay cash or finance major purchases?

With inflation soaring, the economy contracting and the labor market putting upward pressure on wages and other employee benefits, business owners need to be more strategic than ever when deciding how to handle major purchases or investment projects.

The first question – and perhaps the most important one – is: Should I pay cash or finance those major purchases?

The real answer: It depends

Cash is king

The primary principle to remember when weighing this decision is that cash is king. The more cash you have available, the more control and options you have.

Above all, before making any decision, make sure you know the scope of the project and how much it will cost.  Then you can balance how much cash you have on-hand – including reserve funds – with any future financial commitments you have. This would include real estate and property taxes. And don’t forget to consider cash needed for your income tax bill in April and estimated tax payments due on a quarterly basis.  

At the end of the day, paying outright for a major purchase always has its benefits. Namely, you own the asset outright, which typically means less paperwork on your end since you are not incurring debt.

Financing can be the right answer too!

While you may have sufficient cash reserves, you don’t want to make decisions that will leave you strapped for cash in the foreseeable future if you have large re-investments. While you weigh current obligations with anticipated needs, keep in mind that you don’t want to risk being overleveraged.

So, in addition to knowing your cash-on-hand, evaluate the current interest rates and project cash needed for the next quarter. For instance, there could be situations where it makes sense to finance a project with a floating interest rate at first and then pay it off when economic conditions improve. Our team at Antares Wealth Management provides monthly market reports that describe trends in the market and the economy. This is a handy resource, particularly when facing a long-term investment. Please let us know if you would like to learn more and we can put you in touch with one of our advisors.

Knowledge is power

Having a clear understanding of your financial situation is the best first step you can take. Consider asking your accountant to run excess cash computations each quarter and discussing those reports so you can make informed decisions.

For McDonald’s owner/operators, our team is here to advise you specifically about how the new financial scoring will impact your decision to buy or finance.

Tracy Young is a Senior Manager and Team Leader for our Client Services Team. She can be reached at tsy@antharescpas.com.

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