With nearly $800 billion in Paycheck Protection Program (PPP) loans approved by the Small Business Administration (SBA), some business leaders are considering the best way to use extra cash from PPP loans in their bank accounts. While data shows that almost eight out of ten businesses use equipment financing and leasing to acquire assets, more may consider purchasing equipment, thanks to PPP funds. Is this a good idea? It depends.
In more than 25 years of experience helping companies finance equipment purchases, I’ve learned that there are too many variables between businesses, industries, strategic plans, succession plans, and more to make blanket statements. However, before you plunk down a large amount of cash for your next equipment acquisition, here are some important considerations.
Get The Most For Your Money
Just because you’re flush with PPP cash, doesn’t mean you should spend it on rapidly depreciating assets. In recent months, general economic trends show inflation and prices increasing while interest rates remain near all-time lows. Now is generally a good time to secure low-cost debt — borrowing today with a fixed interest rate. As inflation rises, your revenue from your equipment also increases while you’re paying the same low interest rate on equipment you secured before prices continued to march up.
Consider Long-Term Plans
If you’re a small business, showing cash and equipment on your financial statements makes it easier to borrow. Consider your short and long-term strategic plan. Are you planning any of these big transitions in the next few years?
- Buying a competitor or buying out a partner
- Setting up an Employee Stock Ownership Plan (ESOP)
- Entering another market or industry
- Buying another franchise
- Merging with another company
- Implementing robotics or automation
Any of these situations, and many more, are easier to accomplish with cash on hand. Small businesses usually find banks are more interested in lending to them when they have cash and equity on their financial statements. Using cash for more strategic purposes, rather than on equipment that you will need to replace, might be better for your business.
Further, Section 179 of the Internal Revenue Service (IRS) Code allows you to deduct the cost of certain equipment as an expense instead of depreciating it over time. With leases, this can translate into lower payments for you, as well.
Examine Industry Trends
Take a hard look at your workforce, automation, artificial intelligence (AI), and equipment obsolescence. Many businesses are having extreme difficulties hiring, not the least of which are equipment manufacturers. Is the equipment you’re paying cash for today going to be around in five to ten years? Will you possibly be automating your processes due to industry changes, workforce pressures, and increasingly adopted automation systems? Many financing and leasing programs allow you to trade in old equipment so you’re not stuck with it if you change your business model.
I’ve spent my career in equipment finance, so you’ll understand that I am not a lawyer or a tax attorney. Make sure to connect with them before you consider using any PPP loan cash on business expenses. The SBA’s PPP loan forgiveness guidelines includes some non-payroll expenses, such as rent and equipment leases, but you’ll want to square everything away with those professionals, as well, if you ultimately decide to spend your PPP cash on equipment for your business.