Whether you want to upgrade to the newest technology, need to replace worn equipment or give your lobby a facelift, what should you consider before making a capital investment in your business? Unlike recent years, business owners now face increasing costs to carry debt. How do you make improvements to your business while still remaining financially solvent? I have outlined five key factors to consider before committing to a capital investment:
Will your current cash flow support new debt? Any recent debt will need to be structured in a way that is not burdensome to cash flow and allows you to obtain advantageous lending terms.
Know your targeted cash reserves. COVID-19 taught many practice owners that navigating business interruptions is a crucial piece of a strong and healthy financial plan. Knowing your targeted cash reserves is critical. It’s important to take into account your current debt picture if you are carrying any loans that should be paid down first. If you do not know your cash reserves target, take a moment to work with a financial service specialist to determine that amount.
Make sure you are getting competitive loan offers. If you decide to move forward with your capital investment project, how do you structure the loan in a rising interest environment? While the banking industry is continuing to offer competitive terms for borrowers, working with multiple banks to secure the best loan is something that should not be skipped. Do not settle for one bank’s offer without checking what competing banks are willing to do for you. Letting banks know they are in a competitive bidding process will help to drive the best possible terms.
Optimize the mix of down payment and amount borrowed. Now that you have spoken to multiple banks about your borrowing needs, how much money do you want to put down for the project? For many years when rates were suppressed, it made good sense to finance as much of the project as possible. Today, that may not always be the case and the impact on cash flow of a new loan should be tested. Financial service professionals can stress test your cash flow, determine the impact to your bottom line and create a financially responsible path to move forward. You do not want to sacrifice retirement savings or necessary cash on hand to complete a project if you do not know how it may impact your business.
Know the short and long-term cash flow impact and profit contribution of each capital investment. In the past, practice owners would make a purchase with the mindset they will refinance the debt later and secure better terms. New equipment purchases were a common item to be bought directly through the seller to secure incentives for the deal. In many cases, the buyer planned to refinance the debt in six to twelve months. This is no longer a guarantee and makes the initial terms of the loan more important.
There is no hard and fast rule for how much money should be put down when securing a loan. The bank will have its requirements, but should you consider putting more dollars down for the project? Or is it more advantageous to elect a different loan that has a higher interest rate, but helps to protect your cash reserves due to a lower capital requirement at the time of the purchase?
Practice improvements are commonly made to increase production, streamline your business operation or to update an office space to create an optimum patient experience. All of these projects can be good investments over the course of your lifetime as a business owner but determining the short and long-term impact on your cash flow and profitability should not be left for chance. Know before you commit your dollars to the project. As you navigate this process, it is important that you have a fiduciary advisor supporting you along the way and not someone who stands to collect a commission for closing the loan.
The practice integration advisors at Buckingham help dentists achieve financial success by incorporating a thought-out and customized approach to managing your practice. We are happy to help you understand how a capital investment in your practice fits into your business and can help support your professional and personal financial plan. Schedule a conversation a conversation with us today!
About the author:
Brian Roemke, Buckingham Strategic Wealth Practice Integration Advisor
As a practice integration advisor, Brian provides comprehensive financial planning services to clients. He appreciates the importance of a well-rounded team working collaboratively to develop, implement and monitor a plan that helps clients achieve their distinct goals.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information may be based upon third party information and may become outdated or otherwise superseded without notice. Third party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-22-4166