How about this. Let say you had $12,000 in cash on hand. Post tax so it's your 12k. You've researched and realized you need a larger piece of equipment to either expand your offerings or keep up with productivity at a cost of $10k. If you go take a loan say for 4.9% for 60 months. No 0% promo deals just a straight loan. Take the full term you pay $1295 in interest. Other end is you dump the 10k into the piece taking the chunk of your savings.
Business takes a slide for whatever reason. With the loan you have a $188 payment but the 10k is there to help relieve that burden and any other expenses or losses. Pay 10k cash for equipment and business takes a hit, little is there to help. No $188 payment but now rent is due but sales are down. Not much extra cash so in order to keep lights on you gotta borrow. Loan guy can keep picking away at his cash. 2 months later business is back up loan guy is still afloat but needs to replenish that savings if he can. Cash guy is 2 months overdue on rent or had to borrow at some crazy rate to cover those 2 months. Now business is back up and we've been able to stuff away 10k again. Loan guy now has $17,000 after the $5000 loss due to light business. Cash guy owed 5k had 2k and now owes 3k so ends up with 7k. Loan guy is comfortable with $10k in the account so puts $7000 into the equipment and owes very little and will pay off next year and not pay anywhere near the $1200 in interest. Both survived and end up with about the same amount but cash guy nearly lost it all. Now if we weren't even and cash guy had 20k then fine spend 10 stil have 10.
If business stays down they're both in trouble.
I'm sure we can all come up with scenarios but having cash on hand is probably the safest bet whether you loan or pay cash. Having reserves is best, right?
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Last edited by MDLawn; 10-24-2012 at 12:19 PM.