Few businesses were left untouched by the Covid-19 pandemic. Naturally, capital expenditures took a major hit during the first two quarters of 2020, as many businesses had to conserve working capital or seek capital injections just to stay afloat. Now that the economy is recovering, firms can think about growth once more. Capital expenditures are starting to rise again, thanks to the bounce-back in consumer spending.
Corporate-level businesses are experiencing renewed momentum. Manufacturing capital expenditures are expected to grow 7.7% in 2022. And 83% of business economists reported increased capital spending.
Large businesses have a number of options as they seek to expand their operations, but they face different challenges with each option, including overcoming pandemic era-related planning and costs, as well as overall upfront costs. It is vital that companies find a way to address these challenges, otherwise the costs may throw off their projections and accounting systems. Because capital expenditures usually take place over the long-term, it can be difficult to track and manage them due to issues with discount-rate estimation. If they're not careful, companies may be forced to use funds earmarked for other near-term goals to pay off unforeseen costs.
Cathay Bank’s lending services can address these challenges and support expansion and upgrade efforts. Below are the top three strategies we recommend.
Capital expenditure budgets can get out of hand quickly, given their large size and extensive time frames. Before launching any project, make sure to determine feasible deadlines, nail down a scope, and get the entire plan reviewed and approved by the leadership team. The more accurate your plan and budget, the better your outcomes will be. That means getting down into such details as exactly how much manpower, materials, and other resources will be required to see your project through to completion.
There are pros and cons to using existing funds to purchase the capital asset in its entirety, or to pay it back over time. How immediate is the need for that particular asset? If it is vital to the operation of your business, and will be for the long term, it may be better to purchase it outright now. Another consideration is how many other capital expenditures you are looking to make. If this is one of many, and you can get low interest rates, you may wish to purchase more with debt than go all-in on purchasing one asset in cash.
However, going into debt can also impact your ability to purchase assets in the future, so make sure to take that into account. If your business has an existing loan relationship, there could be restrictions on un-financed Capital Expenditures, should you opt to pay cash vs. finance. Review your options with your banker prior to making a decision on either a cash or financing option.
Many companies create a completely separate budget for their capital expenditures. This allows them to zero in on exactly where and how they are choosing to invest in these vital upgrades, and it makes it easier to track the nuances inherent to this type of spending. A separate budget can also help with streamlining tax issues, since capital expenditures are spread out over many years, compared to the annual bookkeeping for other expenditures.
Capital expenditure-based financing helps businesses reach their goals and makes it more feasible to upgrade equipment, technology, and facilities to meet their needs. The key is to plan early, evaluate options, and ultimately choose a financing source that keeps the process organized and streamlined. Then, the economy's renewed momentum is theirs for the taking.
For those businesses that are seeking to upgrade equipment, technology and/or facilities, options such as vendor financing (where the seller finances the purchase), equipment financing, bank term loans and, if it's an especially large job, project financing.
Cathay Bank provides term loans that could meet a client's needs when upgrading equipment, technology or facilities (real estate). We can structure repayment to meet the borrower's needs, and our SBA group could provide additional options. Cathay Bank can also provide adjustable structures based on the borrower's capacity. We can also provide fixed rate options to minimize interest rate risk.
This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.
