“You’re gonna need a bigger boat.”
- Brody, played by Roy Scheider, in the movie “Jaws”
The need for fixed assets is not always this obvious. But all businesses need them. Computers. Furniture. Vehicles. Shark boats. So, how to pay for them?
Here’s a bit of business wisdom I picked up a long time ago:
•Pay for normal operations using cash flow.
•Pay for growth and fixed assets using borrowed funds.
You may be thinking: “Borrowing? I don’t want to go into debt. My goal is to eliminate debt.” That’s a worthy goal, pursued by virtually all small-business owners. And at some point you may reach a “critical mass” of cash on hand. But for many companies – especially fast-growing ones – daily operating funds may not pile up fast enough to pay cash on the barrelhead for all the needed fixed assets.
It’s not my aim to promote debt. But responsible use of borrowing and financing might help you avoid the cash crunches that can lead to emergency borrowing. Among the dozens of business decisions we all have to make: whether, when and how to use debt.
Any purchase that involves payments over time deserves your focus, as there is ample opportunity for problems:
•A low price may be gobbled up by a high interest rate.
•A low monthly payment may disguise a high total cost, including principal and interest.
•Stringing payments out over too long a time may mean you’re still paying for an asset after it has outlived its usefulness.
•Taxes and timing both come into play also. How will it impact my tax liability if I buy it this year or next?
As a business owner, you have the responsibility to maintain a healthy balance sheet. That doesn’t preclude the use of borrowing because you also have a need to put assets in place so you can conduct business. The art and science of balance sheet management involves doing both.
Leasing is a popular way to purchase assets – especially vehicles. It is generally referred to as “off balance sheet” financing, as the asset is kept on the lessor’s books. Not all leases are created equal though, so see your tax adviser.
Even if your business is incorporated, plan on signing a personal guarantee for any sort of financing. Pretty much any privately held business will be subject to this requirement, so you may as well get used to it.
There’s a lot to consider, so find out about leasing, interest rates and tax rules before you’re under the gun to make your next big purchase.
Approach any major purchase with both eyes open, and do your homework. If a slick-talking salesperson tries to pressure you into a quick decision with a come-on that sounds too good to be true (“Just 72 easy payments …”), put your hand on your wallet and run away. Debt is sort of like a big dog: Don’t fear it – but do respect it. It can bite you.
“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.”
- Ogden Nash
Bill Collier is the St. Louis-area coach for The Great Game of Business. He helps businesses increase accountability and results with open-book management. He is the author of “How to Succeed as a Small Business Owner … and Still Have a Life.”He can be reached at 314-221-8558 or billcollier@greatgame.com. His blog is http://ggobstl.wordpress.com.