Five Tips for Capital Equipment Purchases

Cash flow is the foundation of any business, but it plays an especially important role when it comes to capital equipment purchases. By financing such purchases, businesses can realize several benefits, such as more consistent cash flow, preservation of working capital, better management of the company’s bottom line, tax advantages, streamlining of the purchasing process, and preservation of bank lines of credit.

However, a major obstacle facing businesses during this current, recessionary climate is the difficulty—and sometimes downright inability—to secure the funding required for the purchase of capital equipment.

Below are five basic guidelines to help businesses navigate the process of obtaining a loan. One thing that you don’t want to do is adopt the line of thinking that you shouldn’t invest in capital equipment during a recession. Remember: the right equipment can help your business weather this economic storm.

1. Assess how the equipment will be used.
First of all, what are you hoping to achieve with the equipment purchase? Will you increase productivity? Stay ahead of your competitors? It will help to have this clear in your mind—and the return on investment quantified on paper—when you talk to prospective lenders.

2. Mind your own business.
Before entering into any loan agreement, analyze your company’s financial situation first so that you have a good idea of where it stands, in terms of creditworthiness. Take a good hard look at cash flow, examine any financial issues or problems and get a thorough overview of the state of the organization’s financial picture. In addition, be sure that you can access financial statements—including balance sheets, income statements, information about owner’s equity and other types of information that a prospective lender will require.

3. Consider your supplier as a resource for financing.
Suppliers have a vested interest in making the loan. After all, if a business doesn’t qualify for financing, then the supplier doesn’t make a sale. Also, a supplier will recognize the value of their equipment and will be more likely to accept it as collateral than would a bank. They may also be more willing to finance a larger portion of the purchase price.

4. Be strategic with your payment schedule.
Think about what your cash flow situation will look like after the purchase, and try to negotiate your payments to coincide with those times when you expect to receive cash flow generated by the financed equipment. In some cases, you may be able to defer the very first payment for several months—which gives the business an opportunity to generate a revenue stream from the new equipment.

5. Know the options.
Should you purchase, lease or rent? Each has its advantages and disadvantages, and you owe it to the business you’ve worked so hard to grow to thoroughly investigate the option that’s best suited to your situation.

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