01.04.2019

Deposits versus cash flow

When financing a new machine, is it better to pay a deposit on the asset or borrow more against it and use the extra money to repay other debt or to boost your cash reserves? The answer lies in how the rest of your finances are looking.

First, look at the monthly payments on the asset and what they would drop to if a lump sum were to be repaid. As before, look at the economic lifespan of the asset and try to best match the lending to this.

Be aware that with new machinery, deposits can be large in dollar terms and this needs to be taken into consideration. However, it is much easier to source 100 percent funding on brand new gear than it is on second hand equipment. 

If cash flow is an issue, it may be advisable to opt for 100 percent funding as it will retain the cash in your business and give you better access to funds as you need them for working capital.

Where cash flow is strong, a deposit will give you a wider range of funding options, as different lenders have different appetites for Loan to Value ratios. It will also ensure you have equity in the equipment from day one and reduce the forward monthly repayments.

Talk to your business partner at Finance New Zealand about how to structure your finances to best suit your loan repayments and cash flow needs.