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Should your business use financing or cash to make a purchase?

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Small businesses are considered the “backbone” of the American economy.  Every President tells us that in numerous speeches, newspapers and websites report on that, and most Americans pass by dozens of small businesses every day.  In many ways, they are the most visible features of the community that make up where we all live.

Because of this, it is easy to lose sight of the complicated decisions small business owners must make on a daily basis.  One of those issues surrounds their decision to finance a purchase or use existing cash reserves.  What does a small business owner need to consider if they are thinking about expanding their business, or purchasing new equipment?

Cash

Small business owners need to know what their financial position is at any given time.  Accounting programs can help keep track of this information.  Depending on the size of the company, perhaps there is an employee tasked with bookkeeping. 

If your small business has cash saved, you then have to determine what your short and long-term goals for the business are and try to anticipate any needs you might have before you can recoup your investment.  

It may seem simple to use cash because you won’t have to pay any interest to a bank or other lending institution, but you may be left unprotected in the event of an unexpected expense.  If you have enough cash to comfortably cover your purchase, then all the power to you, but if you have any doubts about your financial strength, alternative forms of financing may be for you.

Financing

There are many different types of financing available for a small business, all of which come with different interest rates, equity stakes and liability. 

A logical place to start looking for a loan is the bank with which you have an existing relationship.  Like any other lender, they will require a complete set of financial statements, so they can assess the risk associated with offering a loan.  Banks may be more conservative in their lending than other sources so it shouldn’t be a surprise to not receive what you are looking for, either in the amount they are willing to give you, or the interest rate at which you will be required to repay the loan.

Perhaps you are in a position where you can offer a bond to investors.  This can be a complicated process but may yield a positive outcome for both your small business as well as the investors (or shareholders if you are set up as a corporation.)

Other options may cost you nothing in interest payments, or even in loan repayments; however, you will be forced to concede a portion of your company’s equity in return for the cash infusion.

Please feel free to email me or call me at (401) 383-9694 for more information.  We can work together to see what type of financial decision is best for your small business.

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