July 15, 2024


Delighting finance buffs

Nobody Likes Paying Interest

Nobody Likes Paying Interest

We understand that completely; nobody likes paying interest, neither do we. It’s an emotional hot button for any business person when financing equipment or acquiring working capital. They feel it’s like money thrown away into thin air… or is it? Interest is the price you pay when using someone else’s money to finance something. So why not pay cash and eliminate interest? When business folks say that to me I respond with, “if you have unlimited cash or if you have enough resources that paying cash won’t jeopardize your business cash flow then go right ahead”. I never argue that point because it’s an emotional one. But the warning should be clear; paying cash for something which cripples your ability to have capital for emergencies, market changes, market opportunities or expansion is not wise. If your market changes and sales slowdown, going to your bank and borrowing capital may prove difficult; it’s not going to be easy because traditional lenders are not risk takers and lending to a downward trending business is “risky”.

Financing assets along with paying interest allows you to preserve your capital and the longevity of your business. Of course the finance payment has to make sense; it has to fit within your monthly budget and the asset should contribute in one way or another to your bottom profit line. It should make you money or save you money. The third contribution is harder to measure which can be image and goodwill; if you’re a custom interior kitchen retailer then investing in a modern showroom for your clients to see your products can be invaluable and give you a high return on your investment but again that’s a little harder to put an exact number on. In any case, the finance investment still has to be manageable within your budget.

Though nobody likes paying interest, it has to be looked upon as simply part of your return-on-investment calculation to assure you are making the best use of your new equipment addition. How to get the lowest rate? Maintain your personal FICO as high as possible and get it repaired by a service if you get into trouble, review your D&B business profile and make sure it’s accurate, if any tax liens exist then establish a payment plan and have it documented and in place which shows you’ve taken the right steps to resolve them and finally have your financial statements prepared by a service, bookkeeper or accountant which will indicate you are organized and manage your business seriously. In the long run if managed properly, the finance interest you pay will actually pay you back.