Preserve your working capital
The Denver area economy is climbing steadily out of post-recession lows, according to the Metro Denver Economic Development Corporation April Economic Summary. “Total Metro Denver employment across all industries in February was up 2.2 percent over-the-year, as was employment statewide. Results of the most recent Manpower Employment Outlook Survey suggest more U.S. employers will add jobs in the second quarter than added positions during the first three months of the year.”
With the increased optimism in the marketplace, companies are beginning to loosen their belts on expenses, including investments in human capital, technology and operational expenditures.
According to the Q2 Economic Outlook Report from The Equipment Leasing & Finance Foundation, investment in equipment and software has grown steadily for eight straight quarters.
At the same time, many prudent business owners and executives are holding on tight to cash reserves with the remaining volatility in the marketplace. Many Colorado companies have had to cut costs since the economic meltdown and as a result are leaner today. Others were significantly overleveraged and have had difficulty with access to capital. Although there are many signs pointing to the economy trending upward, including spikes in job growth and consumer spending, we are witness to business owners being much more cautious with their cash and preserving their working capital for additional investments or potential troubling times ahead.
“Even though we have seen a slight uptick in business activity, I am not convinced that we are completely out of the woods,” says Doug Dahlstrom, president of Ponderosa Construction. “We are maintaining a healthy cash balance, in order to help us survive another possible downturn in new construction orders.”
With the current economic picture, leasing has become an attractive alternative for financing technology, equipment or other resources to support growth, enhance employee productivity and improve operations. Leasing has long been a widespread practice among both public and private sector entities, but may be more appealing than ever as it allows companies to keep their cash reserves and earn a higher rate of return than could have been achieved if working capital was used to purchase depreciating assets.
For companies who may be in a growth mode, operating leases enable them to essentially “rent” the necessary equipment with off-balance sheet financing and without over-leveraging. Typically, there is little or no down payment required or no large initial outlay of cash with an operating lease. Assets including hardware, software, office equipment and more can be bundled into one lease, and the entire lease payment for these items can be deducted as an operating expense.
Of interest to many executives and small business owners is the opportunity to upgrade technology every few years through an operating lease. Rather than owning depreciating assets, this type of financing allows business owners to stay current with the latest technology, while providing protection from fair market value fluctuations on most equipment.
Types of equipment or hard collateral often leased:
- Phone systems
- Construction equipment
- Office furniture
- Medical equipment
- Hotel furniture and fixtures
Today, we are seeing short term leases (12 to 30 months) due to the improving economy, which appeals to some business owners looking to pay off financing quickly. Depending on a company’s cash flow needs, leases can be structured up to 60 months with a lower monthly payment.
The following are a few requirements that business owners should prepare for when considering commercial financing:
- Financial statements (P&L and balance sheet, audited, if possible)
- Bank referral
- Description of equipment and supplier
As the economy trends upward, jobs are added and businesses are reinvigorated, the cycle for equipment replacement is underway. Financing these types of business expenses can free up cash for other areas, unforeseen circumstances and, most importantly, allows for the preservation of a company’s working capital.