I remember being a kid of the ‘90s, and my parents worrying about borrowing money and the associated high interest rates. Days when interest rates were 17% and higher. Now, times are quite different and interest rates are the lowest they have been in Australia for a very long time. Often clients, particularly those owning pubs, ask us whether they should make more financing purchases as a result of these low interest rates.
Unfortunately, it’s not a simple yes/no answer, and there are many factors which need to be considered. Here we discuss five key points which are important to think about when deciding whether to finance purchases for your pub:
1. Will the new purchase drive sales or efficiencies?
Just because you can afford to buy something, doesn’t necessarily mean that you should buy it. Think about whether the new purchase will do one of two things – will it drive sales? or will it drive efficiencies?
It might seem a simple concept, but sometimes it’s easy to fall into the trap of thinking you should buy something, just because interest rates are low. If customers are cold in the dining room over Winter and your heating system isn’t up to scratch, then a new heating system will most likely drive sales. If there is an outdoor area you could turn into a beer garden, then this too will likely drive sales. Or, is there a new machine you could purchase that would improve efficiencies, then this would be a good purchasing decision.
2. What are the ‘other costs’ ?
Often many financing agreements include a range of ‘other costs’ on top of your interest repayments, such as setup fees, termination charges, monthly bank charges and many more. It’s important to factor these into your calculations. Prepare a repayment schedule, or ask your accountant to prepare one for you, which lists all the upfront charges, as well as ongoing payments and interest charges. This will allow you to better understand the ‘true cost’ of the financing agreement and just how much the financing arrangement will cost you.
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3. Consider the interest and other financing deductions in your calculations
If you finance a purchase for your pub, then in most cases the interest and other financing charges will be tax deductible. When you are working through the cost of financing a purchase, ask your accountant to prepare the calculations under two scenarios – being ‘before tax deductions on the financing charges’ and ‘after tax deductions on the financing charges’.This will better reflect the overall financial impact of the purchase.
4. How much are you comfortable borrowing?
Generally what you can ‘afford’ to finance is very different to what you are ‘comfortable’ financing. When I speak to clients about financing, I always ask them to consider how much they would be comfortable borrowing under a ‘worst case scenario’. If sales dropped or there were a few unexpected expenses, would they still be able to afford the repayments? It’s often a good idea not to make decisions about buying new assets when you’ve had an exceptional sales month, because you’ll often end up overestimating your repayment ability.
Another simple trick I like to use is to think to myself ‘if the interest rates were a few %’s higher would I still want to buy it?’ If the answer is no, then I don’t go ahead with the purchase.
So, don’t rush into refurbishing the beer garden before thinking a bit more about it and doing your calculations.
5. Is cash better in your pocket now or later?
In some cases, clients often have the cash in the business bank account to purchase the new furniture for the dining room in their pub, but choose to finance. Often the reasons for this are that they want to keep money in the bank account to spend more money on advertising, promotions, new staff, other asset purchases, or just to keep money aside for business emergencies. Here at Dexterous, we often work through cash flow budgets with our hospitality clients when they are considering purchasing new assets to help answer this question. This involves considering regular available cash, upcoming purchases, liabilities and how much cash should be kept in the business as a buffer.
Lower interest rates means you may have started thinking about buying new assets for your pub, however it’s important to not rush into a purchase. Think about all the points discussed above. Will the new purchase grow sales or improve efficiencies? How much will financing cost your pub? Is financing the best option? If you need help putting together a plan to better understand all the different options and accounting implications, the team at Dexterous helps other hospitality owners with this and can help you too.