Whether you are new to the car care business or you have an established facility, you 'II eventually be faced with the decision to either purchase new equipment outright or finance the acquisition.

Is Your New Equipment Acquisition Justified?

In today's competitive environment it is more important than ever to have the most efficient and productive equipment possible. The right equipment can mean more production, lower labor costs, less utility usage and better customer service, all of which can translate into more profit. The cost of new equipment however, may seem prohibitive; therefore, the decision to get new equipment and how to pay for it requires serious analysis.

A number of factors may answer this question. The most economically realistic method to justify new equipment is determined by its return on investment, or ROI. First, one must assign a dollar value based on the use of the equipment. This might be a combination of savings from lower costs such as labor, utilities and maintenance, with higher production and revenue. Once you have this number you can determine how long it takes to recover the equipment's cost. For example, if a new car wash costs $500,000 but produces $10,000 a month, it takes 50 months to recoup the initial $500,000 investment (setting aside the time value of money). If the wash's value will drop significantly or even cease after only 60 months, then the return may not be attractive, as it takes most of the equipment's useful life just to recover its cost. If, on the other hand, the machine will continue to produce $10,000 a month for years after its cost is recovered, it is probably a very good investment.

The shorter the time required to recover investment cost relative to the length of the economic benefit, the better the investment. Of course, there may be other compelling reasons - environmental, regulatory or otherwise - to purchase new equipment even when the return on investment is not particularly attractive. Even then a complete ROI analysis is important.

Paying For Your New Equipment

If new equipment makes economic sense, then a second important decision must be made; how to pay for it. There are three choices - cash, loan or lease. A cash purchase takes funds from operating cash flow and retained profits. At first glance, a cash purchase may seem the least costly, as there are no interest or finance charges. If other factors are considered, however, a cash purchase can turn out to be the most expensive way to acquire equipment. Cash used to pay for a new car wash is in after-tax dollars. For a profitable business paying federal, state and local taxes, the cost of a cash purchase could be as much as double (depending on tax rates), since the dollars used have already been taxed as much as 45%. In other words, nearly $2 in revenue had to be earned in order to have one after-tax dollar to pay for the equipment.

Of course, this doesn't apply to less profitable companies. For them, other factors can make a cash purchase even more costly. If profits are marginal, there are probably serious working capital and cash flow concerns. Using limited cash to buy equipment can deplete working capital to a dangerous level. Once cash is invested into machinery, it becomes an illiquid fixed asset. While there’s equity value in the equipment, it can’t be tapped for ongoing operating expenses. In fact, the cash trapped in equipment equity could be that little bit extra needed to carry the business through a slow period or even a recession. Consequently, a cash purchase of any significance is usually unwise unless substantial and permanent cash surpluses exist.

A bank loan preserves your cash, but uses up the bank credit you have set aside for other needs, such as real estate or business investments. It’s also sometimes difficult to get your loan term to match the useful life of the equipment you’re purchasing. In other words, you could be making payments on your car wash for 20 years when it’s in need of replacement after 10.

In addition, banks will typically finance only 80% of the amount you need and will not finance your soft costs, such as delivery & installation, plumbing and electric. Slow processing, high closing costs, cumbersome paperwork and lack of payment flexibility can be indicative of a bank loan. Also, keep in mind that banks do not really understand your business. They are generalists, which means they don’t specialize in any particular market segment or have established relationships with the major “players’ in your industry. Many car wash manufacturers require a hefty down payment to place your order and the bank must fund it. You, then, are required to start making your loan payments sometimes months before the equipment is delivered and generating income for you. A bank loan may be better suited to your purchase of property or a construction project to expand your business rather than an equipment purchase.

A lease preserves both your cash and bank credit availability. Independent finance and leasing companies will usually finance 100% of the amount you need, including the soft costs. Faster processing, simple paperwork, creative payment structures, and terms that match the useful life of your equipment are all benefits you can realize with a lease. Leasing probably makes the best sense when compared to the other options mentioned above.

Choosing the right company to provide your lease is as important as making the decision to purchase the equipment. In selecting a leasing company you want to make sure that they understand your business. This means having established relationships with “players” in your industry and a solid reputation. Equipment manufacturers may waive down payments for orders and you won’t have to pay for the equipment until it’s delivered - based simply on the working relationship and track record they have with the leasing company.

Remember, the decisions you make today will impact the success of your business tomorrow. Choose wisely.

This article is provided by Butler Capital through the efforts of Anita Baron, Business Development Manager. For more information go to Butler Capital's website at www.butlercapital.com.