You’ve heard it said many times that you have to spend money to make money. Unfortunately, if your business is seasonal or you need to purchase new equipment, you may not have the cash on hand to rent or purchase it in one lump sum.
Funding Capital Expenditures
Capital equipment items typically last a long time but require significant funds to secure. These assets are often accumulated but not used for ordinary business. Included in this category class are trucks, machines, office furniture and similar items. Funding for these items is usually a challenge.
Owners want capital equipment in order to improve their operations over time. It can take several years to see the benefit. Accountants call these items capital assets. and their performance is based on year-to-year comparisons. Financial metrics like Total Asset Turnover and return on total assets (ROA) can keep expenses aligned with the impact on the bottom line.
Find Out if an Asset is a Good Capital Expenditure
Most businesses establish measures to decide what capital items to purchase and which not to. The criteria include local tax laws, but also require accounting changes to be adopted by corporate managers. To qualify as a capital expenditure worth borrowing, capital items must:
- Serve for a minimum useful service life of at least one year
- Carry an acquisition cost above a certain threshold of at least $1,000
- Contribute value to the business in a measurable way
Capital Equipment
Business firms handle non-capital and capital funding differently during the acquisition process. There are typically in-house metrics that look at asset management expense versus performance enhancement enabled, and the valuation and reporting for these items vary quite a bit.
Where Can Business Find Funding for Capital Expenses
Online and nontraditional lenders are often a key source of funding, especially in high-risk industries.
“Access to financing is one of the most important keys to success for any business. If you are looking to get funding for your business, you probably need the money quickly and on good terms,” according to Smarter Loans, an online platform for smarter business loans.
Final Word
Taking out business loans for capital expenditures involves significant risks, due to the high cost of equipment and other capital items. It’s important to have a clear way to track the operational benefits –either lower expenses or higher profit margins–against the cost of borrowing. However, securing reliable funding often requires going to non-traditional lenders willing to take a chance on your company.
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