Never use working capital to finance equipment. Here’s why…

There are some really innovative small business working capital providers breaking through in the market today. While caution must be used to ensure proper use, they fill a void where banks are no longer meeting the need. In light of these solutions, we are hearing more often that they are, somehow, viable alternatives to more traditional equipment lending, especially in “credit challenged” circumstances. Not so fast!

Working capital is for, well, working capital. It’s almost never a good idea to finance a fixed, depreciating capital asset you will have for more than a year with working capital debt. To explain, let’s start with a really nice definition from our friends at the SBA:

“Working capital is the difference between current assets and current liabilities. Current assets are the most liquid of your assets, meaning they are cash or can be quickly converted to cash. Current liabilities are any obligations due within one year. Working capital measures what is leftover once you subtract your current liabilities from your current assets, and can be a positive or negative amount. The working capital is available to pay your company’s current debts, and represents the cushion or margin of protection you can give your short-term creditors.

Positive working capital is essential for your company to meet its continuous operational needs. The availability of working capital influences your company’s ability to meet its trade and short-term debt obligations, as well as to remain financially viable. If your current assets do not exceed your current liabilities, you run the risk of being unable to pay short-term creditors in a timely fashion.

Businesses that are seasonal or cyclical often require more working capital to stay afloat during the off season. Although your company may make more than enough to pay all its obligations yearly, you must ensure you have enough working capital at any one time to meet your short-term obligations.”

So, how many times did we highlight the phrase “short-term” or “current debts” or “within a year”? Now, how many businesses pay off all their equipment debt in a year? Using working capital debt, which is designed for short-term capital need, to finance equipment, which is a long-term capital need, can do 2 really harmful things to a small business:

• It chews up critical access to working capital debt to meet payroll, finance inventories, etc. because of that big equipment exposure sitting in the working capital loan.
• Many small businesses DO NOT PAY DOWN the equipment debt as it depreciates in the working capital facility. So not only have they chewed up access to life-blood working capital, they are massively upside down on the equipment.

The process for these new working capital loans is simple, quick, and can help you easily complete an equipment purchase. But please be cautious not to trade simple and short-term for long-term negative consequences. At SLS, we keep equipment lending downright uncomplicated. Let’s talk.