For many Canadian business owners, paying cash for a new truck, vehicle, or piece of equipment feels like a financially responsible decision.
There are no monthly financing payments, no additional borrowing commitment, and no loan interest.
But there is another question worth asking: What opportunities might you give up by using that cash?
Understanding Opportunity Cost
Opportunity cost refers to the value of the next-best alternative you give up when making a decision.
For a business owner, using $80,000 to purchase equipment means that capital is no longer immediately available for other expenses, opportunities, or emergencies.
That doesn’t automatically make paying cash a poor decision. It simply means the full cost involves more than the purchase price.
Paying Cash Versus Financing Equipment
Paying cash can offer several advantages, including avoiding financing interest and reducing debt obligations.
Financing may help preserve working capital, but it introduces interest expenses, repayment requirements, and other financial risks.
The right decision depends on the business’s cash flow, liquidity requirements, financing terms, and alternative uses of capital.
Where Policy Loans Fit Into the Discussion
For business owners who own eligible participating whole life insurance policies, policy loans may represent another source of accessible capital.
However, these loans are not free money. Interest charges, outstanding loan balances, policy provisions, and potential impacts on the net death benefit must be considered.
Guaranteed policy values must also be distinguished from non-guaranteed illustrated values.
Financial Stewardship Means Evaluating the Trade-offs
The objective is not to suggest that every business owner should borrow instead of paying cash.
It’s to understand the full financial implications of each decision.
Before purchasing your next piece of business equipment, consider what the purchase will do to your liquidity, cash flow, borrowing obligations, and long-term capital strategy.
Watch the Full Conversation
Richard Canfield and Darcy Densmore explore these questions in this Wealth On Main Street episode.
Continue Learning: Explore the 7 Steps to Becoming Your Own Banker at https://7steps.ca/
Educational content only. Not individualized financial, insurance, tax, or legal advice. Consult qualified Canadian professionals regarding your circumstances.