Last editedApr 20222 min read
There’s a wealth of options out there when it comes to making a purchase. What is installment buying, and is it better to buy cash or finance your expenses? There are pros and cons to both installment buying and cash purchases to consider. Here’s a closer look at the advantages of installment buying vs cash purchases for small businesses.
What is installment buying?
The installment buying definition refers to the process of purchasing an asset over time. When you agree to an installment purchase plan, you acquire the asset on the same day and then pay for it in a series of periodic installment. Installment buying is similar to a credit purchase, each spreading the cost of a purchase out over time. However, there are more restrictions involved with an installment plan. You agree to make installment payments until the purchase is paid off, usually with a preset amount and date of the month. Purchases made with a credit card are more flexible, provided you meet your monthly minimum.
What are the advantages of installment buying?
There are several advantages of installment buying to consider. To begin with, this type of plan is convenient for both buyer and seller.
Installment payments can be taken automatically to keep up with the purchasing agreement.
Small installment payments are more manageable for small businesses in comparison to paying with a large lump sum.
Paying large purchases off over time helps your business protect its cash flow.
What is a cash purchase?
A cash purchase is the more straightforward of the two options. The buyer pays for goods or services immediately, either at the time of sale or when the product is delivered. There’s no need for any credit checks, contracts, terms, or conditions. For accounting purposes, cash purchases are also quite simple. The cash expense is posted directly to the business’s expense account.
What are the advantages of a cash purchase?
For sellers, the obvious advantage of cash purchases is an instant boost to cash flow. You receive immediate payment for goods delivered and services rendered. For buyers, there are also several advantages:
Paying in cash doesn’t come with any interest rates or hidden fees.
Some companies will offer discounts for paying in cash.
It’s a better deal when purchasing assets that might depreciate in value over time.
Installment buying vs cash purchase: the bottom line
There are pros and cons to both types of payment. Cash purchases offer the benefit of simplicity. They are settled and recorded in accounting ledgers on the same day, giving an instant boost to the seller’s cash flow. Yet at the same time, they can take a toll on the buyer’s cash flow. If you use all your business’s cash reserves to purchase a large asset, your budget could be restricted until you’re able to replenish your accounts. This is why it’s always advantageous to have an emergency fund that you don’t touch for cash purchases.
By contrast, installment payment plans let you reserve more of your cash for emergencies and spread out the cost. However, they do often come with interest rates that increase the cost over time in comparison to a cash purchase. Loans are subject to approval, so you’ll need to be sure that your business credit is in order before applying for any installment plan. It’s also important to read the fine print so that you’re sure about repayment terms and conditions, as with any credit agreement. Ultimately, there’s a time and a place for both installment buying and cash purchases depending on a business’s cash flow situation
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.