A physician would never use a scalpel to take blood pressure or an ultrasound to draw blood. Yet we often find that companies are using the wrong tool when it comes to financing their equipment, for example, using a short-term instrument to finance long-term assets.
Working capital is for short-term use. It’s the remedy for the cash flow gaps created by payment delays in the receivables cycle, seasonal valleys in revenues or one-time non-recurring expenses. It helps you meet payroll, cover day-to-day operating expenses and generally build smoother cash flows into your business. But more and more, we see leasehold improvements, technology and equipment sitting on the revolving line of credit that is intended to handle finance needs that can be paid off in less than 12 months. Or put another way, like using a scalpel to take blood pressure. It’s the wrong tool for the job.
Long-term fixed assets, like equipment, are generally used for more than a year that have some manner of depreciable life. A CNC lathe, office furnishings or even IT needs all meet this description.
Accumulating assets like these on a line of credit actually lessens your total credit availability. So, while you are paying interest only for the new equipment on the bank line, it’s actually limiting the amount of money you can leverage to cover for the short-term hiccups in your receivables cycle or other working capital pinch. Keeping fixed assets out of the bank line helps you maintain maximum flexibility and access to capital when you need it most.
Equipment financing actually helps your company be proactive with more than just a cleaner line of credit. It allows a low- to no- down payment method of equipment acquisition. You preserve your capital and have manageable monthly payments to improve cash flows. And at the end of that schedule of payments and the equipment life, you can simply re-invest in the newest technology replacing the old payment with a new one—with no interruption in your cash flows. This approach keeps your company on the cutting edge of technology and keeps your bank line free of long-term asset “clutter” on the line of credit.
Ready to Help
At PNC Equipment Finance, we help businesses with a simple way to acquire commercial equipment. As the 4th largest bank owned equipment finance company, we have deep experience helping companies like yours identify and utilize the right financing tools. Connect with PNC by going to www.pnc.com/ef.