Should your business pay cash or borrow?
A new ute, a piece of machinery, a fit-out, or a bigger opportunity: sooner or later every business has to decide whether to pay cash or borrow. There’s no single right answer, but there are clear principles.
Why cash isn’t always king
Paying cash feels responsible, and there’s no interest to pay. But cash in the business has a job to do: paying wages, suppliers and the ATO, and absorbing a slow month or a customer who pays late. Spending it on a long-life asset can leave the business short at exactly the wrong time.
The rule of thumb: match the finance to the life of the asset. Use working capital for short-term needs, and longer-term finance for assets that will earn money for years.
When paying cash makes sense
- The business has a genuine surplus after allowing for tax, BAS, payroll and a buffer of at least a couple of months’ costs.
- The surplus is earning little interest, and the finance rate is higher.
- The purchase is small relative to the business’s cash position.
- You can’t easily get finance, or the cost of finance is high.
When borrowing makes sense
- Paying cash would leave the business without a working capital buffer.
- The asset will generate income (more work, lower costs) that covers the repayments.
- You want to keep cash for opportunities or a growth push.
- Finance is available at a reasonable rate, and the repayments are comfortable in a quiet month, not just a busy one.
The tax effect
The tax deductions for an asset are generally the same whether you pay cash or borrow. You claim depreciation (or an immediate deduction if eligible) either way, and the interest on a business loan is deductible.
For GST-registered businesses, a chattel mortgage lets you claim the GST on the full purchase price in the BAS for the period you buy, even though you’re paying it off over time. With a lease, GST is claimed on each payment instead. See commercial and asset finance for the difference.
Using the owner’s money
If you pay for business assets from your own savings or home loan, how it’s recorded matters. Lending money to your company should be documented as a loan from you to the company. Redrawing on your home loan to fund the business can make that interest deductible, but only if the money is clearly used for the business and the loan is kept separate from private borrowing.
The reverse, taking money out of a company to fund private spending, can trigger Division 7A. Talk to us before moving money either way.
Questions to ask before you decide
- What does the business’s cash flow forecast look like for the next 12 months with, and without, this purchase? See profitable but cash poor?
- Will the asset pay for itself, and how quickly?
- What’s the real cost of the finance after tax?
- Could the business survive a bad quarter with the repayments, or without the cash?
- Is there a better use for the cash?
Getting the numbers right
The best decision comes from looking at your cash flow, your tax position and the finance options together. Your Judge accountant can model it, and Judge Lending can compare asset finance options, with terms from one to seven years and a range of balloon options.