To my fellow (and possibly future) business owners – paying your bills on time is one of the most daunting tasks you will face. My previous columns on Financing Your Business barely touched the surface of this concept. I will address one topic here today with an eye on helping you conserve cash in order to meet your current obligations.
First and foremost, finance all of your assets that provide a benefit over a long period of time. If the benefit pays you back over time, you should be paying for it over a similar period. Do not pay up front for the entire asset purchase.
For example, let’s look at your office premises. I would posit that unless you have unlimited cash at your disposal, do not purchase the real estate. You should be leasing it. Yes, you can make money with a real estate investment, and over the long term it may be more profitable than leasing it from an unrelated third party. Real estate purchases, however, almost always require a significant down payment, typically 20 percent or more of the purchase price. If cash gets tight, you can’t make payroll on Friday with the equity in your building. You need cash. Similarly, if you have trade creditors holding up jobs on past due bills, boasting about the equity in your building will not help you get the product shipped.
Having covered that topic conceptually, now take it a step further. Any and all of your business assets that are considered long term should be paid for over the long term.
The includes computer and related office equipment, even your copiers. Yes, you can pay cash. But if you have $10,000 or more tied up in equipment, the same liquidity problem may arise. Come Friday the payroll and/or vendors need to be paid. There are leasing companies that specialize in financing this type of equipment. If you are not familiar, just ask the major vendors of the equipment. They need the leasing companies to facilitate the sale of their equipment.
Leasehold improvements are the same as computer and office equipment. If you are paying to have cubicles installed, or shelving, filing cabinets, etc., the cash drain adds up quickly.
How about your personal expenditures? For a small business owner, personal and business expenditures ultimately come from the same pot of gold. Do you finance your cars? Do you lease them? The less money down; the more money you have available for your business.
Paraphrasing one of my opening statements – unless you have unlimited cash at your disposal, finance your long-term assets with long-term debt using as little down payment as necessary.
When you need money, it is more difficult to borrow it. By matching the benefit with the repayment, you can weather more financial storms.
After graduating from the Wharton School at the University of Pennsylvania, Harvey Mackler enjoyed a 20-plus year career in commercial banking, exercising his “golden parachute” in 1996. He was executive vice president and COO of our commercial finance subsidiary in Manhattan and chairman of the Small Business Banking Unit of the American Banker’s Association. He has served on the board of the acclaimed George Street Playhouse in New Jersey and chair of the Easter Seal Society of New Jersey for two years as well as a captain on his local emergency rescue squad. He acquired GWI Corp in February, 1997 and transformed it to focus on the Supplier/Distributor/End-buyer model, growing the company's sales by 500 percent. He is past chair of the SAAGNY Foundation, current Co-Chair of the PPAF EXPO and past Chair of the Supplier Committee of PPAI.