The equipment dealer has a simple message: “Only $1,950 a month.” The software vendor offers the same idea: no upfront cost, just a monthly subscription. The fit-out company has a finance partner. Each offer makes a purchase feel affordable, and each quietly changes the question the owner is answering. Instead of “should we make this investment?”, the question becomes “can we manage the repayment?”
Those are different questions. Financing, whether a loan, an equipment lease, hire purchase, a subscription or vendor finance, changes when the business pays and who carries some of the risk along the way. It does not change whether the investment is worth making. A machine that will sit idle half the time is a poor investment whether it is paid for in cash or in sixty comfortable instalments. Public infrastructure policy makes the same point at a much larger scale: Australia’s National Public Private Partnership Policy separates the decision to invest from the later choice of how to finance and procure, so that the availability of private finance does not drive which projects go ahead.
This article explains why the investment decision should come before the financing decision, why the accounting label on a cost should not drive how it is bought, why approved budget is not the same as available cash, and how to keep sight of the fixed commitments that build up one manageable payment at a time. It is general information. Tax and accounting treatment of finance, leases and subscriptions varies and changes, so check with your accountant, the ATO or a financial adviser for your situation.
Funding and financing are different
Two ideas are often blurred:
- Funding is who ultimately pays: the business’s revenue, its owners, its customers.
- Financing is how and when the payment is arranged: cash now, a loan repaid over time, a lease, a subscription.
Financing can be valuable. It can preserve cash for working capital, match payments to the period the asset earns, or transfer some risks, such as maintenance or obsolescence, to the provider. But it always has a cost, and the business still pays in the end. Changing who lends the money does not fix a weak investment.
The right order
A sensible sequence is:
- Need: what problem or opportunity is this meant to address?
- Investment case: is this the best way to meet the need, compared with alternatives such as hiring, subcontracting, doing less or doing nothing?
- Affordability: can the business carry the whole commitment, including running costs, through a bad year?
- How to buy: outright purchase, lease, rent as needed, subscription or service contract?
- How to finance: cash, loan, equipment finance or supplier terms?
The common shortcut runs the other way: the finance offer arrives first, the monthly figure looks manageable, and the investment case is assembled afterwards. The cost-benefit analysis for business decisions article covers building the investment case properly.
Do not let the accounting label decide how you buy
Businesses often have informal preferences: “we would rather it be an operating expense”, or “we prefer to own assets”. The accounting classification matters for tax and reporting, but it should not decide the commercial arrangement. What should shape it are the economic characteristics of the commitment:
- How long the business will rely on it.
- How reversible it is: how hard and costly to change supplier, technology or approach.
- How critical it is to operations, and what happens if the supplier fails.
- What it creates later: service contracts, licences, consumables and support it will lock you into.
- What it is worth at the end: some assets have resale value; subscriptions leave nothing.
Two traps are common. A cheaper asset can require expensive proprietary servicing, so the saving at purchase reappears as higher running costs for years. And a modest monthly subscription can become a large, hard-to-exit multi-year commitment, especially when your data and processes are built around it. The buying for the whole life of equipment article covers planning for what a purchase commits you to after handover.
Budget, cash and commitment are three different things
Even when an investment is approved, three states should be kept separate:
- Budget identified: the money is in the plan.
- Cash available: the money will actually be in the account when payments fall due.
- Commitment approved: someone with authority has agreed to sign.
Treating a budget line as permission to commit can create a cash squeeze when several commitments land in the same month, even though each is within its budget. Map when each significant commitment will actually require cash, including deposits and milestone payments, and check it against your cash forecast, especially in seasonal low points.
Watch the build-up of fixed commitments
One finance agreement rarely causes trouble. The danger is accumulation: a vehicle lease, two equipment finance contracts, several software subscriptions, a service agreement, a fit-out loan. Each was affordable when signed. Together they form a fixed monthly outflow that does not fall when sales do.
Keep a single list of every fixed commitment, with the monthly amount, the end date, the cost of ending early and what happens if you miss a payment. Compare the total with your cash flow in your worst recent month, not your average. The more of your costs that are fixed, the less room you have to absorb a bad quarter. The two breakeven numbers every owner should know article covers how fixed costs raise the sales a business needs just to stand still.
Match the finance term to the useful life
A finance term longer than the asset’s useful life means paying for something after it has stopped earning. Technology, vehicles and specialised equipment can become obsolete or worn out before the last payment. Watch, too, for balloon or residual payments at the end of a term, which can turn a comfortable monthly figure into a large lump sum just when the asset needs replacing. As a rule, the business should finish paying for an asset while it is still producing value, and should know what the final payment will be and how it will be funded.
Space out the big commitments
Several large commitments in the same quarter can strain cash even when each is affordable on its own: a deposit on new equipment, a fit-out progress payment, an annual software licence and a seasonal stock build. Where timing is flexible, spread them out, and favour arrangements that put payments in the months when the business has cash. Where timing is fixed, plan the cash needed in advance, perhaps by arranging a facility before it is needed rather than in a hurry afterwards.
Compare the true cost of finance
Finance offers are often presented as a monthly figure without an interest rate. Work it out: compare the total of all payments with the cash price, and ask for the effective interest rate, fees, balloon or residual payments, early termination costs and what happens at the end of the term. Then compare that cost with other ways of funding the same purchase. A finance offer is a product with a price, and it can be negotiated or replaced.
A worked example
This is an illustration. A landscaping business is considering a compact excavator and trailer with a cash price of $90,000. The dealer offers finance at $1,950 a month for five years. The owner’s first reaction is that $1,950 a month is manageable.
The owner steps back and asks the investment question first. The business currently hires a similar machine when needed, at about $450 a day, and used one on about 80 days last year. The options are to keep hiring, or to buy.
Hiring at 80 days a year costs about 80 × $450 = $36,000 a year, with no running costs, no commitment and flexibility if work changes.
Owning on the dealer’s finance costs $1,950 × 12 = $23,400 a year in repayments, plus about $6,000 a year for insurance, registration, servicing and repairs, about $29,400 a year in total during the finance term. At the end of five years, the business owns a machine with some resale value.
At 80 days of use, owning is cheaper. But the comparison depends heavily on usage. At $450 a day, hiring costs the same as owning at about 65 days a year. If work slowed and the machine were needed only 50 days a year, hiring would cost $22,500, well below the $29,400 cost of owning. The real question is not whether $1,950 a month is affordable, but how confident the owner is that the machine will be used at least 65 days a year for five years, given the business’s mix of work.
The resale value at the end of five years strengthens the case for owning, but only if the machine is looked after and actually used enough to justify the commitment along the way.
The owner looks at the last three years of hire records and the forward order book, and concludes usage is likely to stay above 75 days. The investment makes sense.
Only then does the owner turn to financing. The dealer’s offer totals $1,950 × 60 = $117,000, or $27,000 more than the cash price, which works out to an interest rate of roughly 11% a year. The business’s bank offers equipment finance at a lower rate, and the accountant explains how the options differ for tax. The owner takes the bank finance, and adds the new repayment to the business’s list of fixed commitments, which now totals about $8,000 a month. That is checked against the business’s weakest recent month, the middle of winter, and found to be manageable with the existing cash buffer.
How this applies to a small Australian business
- Decide whether to invest before discussing finance.
- Compare with alternatives such as hiring, subcontracting or doing less.
- Base the decision on usage and economics, not the monthly figure.
- Let reversibility and lifetime commitments shape how you buy, not the accounting label.
- Separate budget, cash and commitment.
- Keep a list of all fixed commitments, and test it against your worst month.
- Work out the true cost of any finance offer, and compare alternatives.
- Check tax and accounting treatment with your accountant or the ATO.
Signals worth watching
- Purchases justified by “only so much a month”.
- Finance offers accepted without knowing the interest rate.
- Subscriptions that are hard to leave because your data sits inside them.
- Several commitments falling due in the same month.
- Fixed monthly commitments rising faster than sales.
- Equipment bought on finance and then lightly used.
- Finance terms that run longer than the asset will be useful.
Common mistakes
- Letting the finance offer drive the investment decision.
- Comparing monthly payments instead of total costs.
- Choosing the arrangement for its accounting label.
- Treating budget as available cash.
- Ignoring the running costs and lock-in that come with a purchase.
- Adding commitments one at a time without seeing the total.
- Financing an asset beyond its useful life, or ignoring a balloon payment at the end.
Frequently asked questions
Is leasing or buying better? It depends on how long you need the asset, how heavily you will use it, its resale value, the true cost of finance and the tax treatment. Decide the investment first, then compare arrangements.
Are subscriptions always more flexible than buying? Not necessarily. Monthly payments can be easy to start and hard to stop when your processes and data depend on the service. Check exit terms and data export before signing.
Should we always pay cash if we can? Not always. Keeping cash for working capital and a buffer can be worth the cost of finance. The key is to know what the finance costs and why you are choosing it.
How much of our costs should be fixed? There is no single answer, but the more fixed your costs, the harder a downturn hits. Test your fixed commitments against a bad month.
What if a supplier offers interest-free terms? Check whether the cash price is lower than the financed price; if so, the interest is built into the price. Interest-free can still be worthwhile, but compare it properly.
What about tax benefits of particular finance types? These vary and change. Ask your accountant or check current ATO guidance before relying on them.
Questions to ask
- Would this investment make sense if we paid cash today?
- What are the alternatives, including hiring or subcontracting?
- How much must we use it for it to beat the alternatives?
- What does this commit us to after purchase: servicing, licences, lock-in?
- What is the true cost of the finance offered?
- What do all our fixed commitments add up to, and can we carry them in a bad month?
Bringing it together
Financing changes when you pay, not whether an investment is worthwhile. Decide the investment first by comparing real alternatives on usage and total cost, then choose how to buy based on how long you will rely on it, how reversible it is and what it commits you to, rather than on its accounting label. Keep budget, cash and commitment separate, work out the true cost of any finance, and keep a running total of fixed commitments tested against your worst month. An affordable repayment is a condition of a good investment, not a reason for one.
Source: KEVOS notes, drawing on teaching material on capital and operating expenditure in procurement, funding and procurement planning, and the 2015 National Public Private Partnership Policy’s separation of the investment decision from the procurement and financing decision. Examples and figures in this article are illustrations. This article is general information, not financial or tax advice.
