Capital Expenditures or in banker terms "CapX" play an important role in most business operations. Capital expenditures are typically comprised of a wide range of fixed assets: from software/hardware, new machinery and equipment to rolling stock such as trucks, trailers or vehicles used in the operations of the business. An investment in these areas often leads to a gain in operating efficiencies and with it, increased profit margins.
Experience has shown that the 3rd quarter of the year is often a good time in the calendar year to take a closer look at this category. And an even better time to discuss the topic with your banker. By now, most owners have a good handle on how the current year is shaping up and are assessing fixed assets that need to be replaced or upgraded. Factors that influence their decision on investing in CapX can include increased revenue, business expansion, hiring more employees or the aging of their current equipment. With tax returns on file and interim financial statements readily available, the lender can be more effective in preparing the necessary financial analysis. Now is a good time to determine how much your business can afford for capital expenditures.
One question to ask in advance is “How much will I have to put down?” While it’s easy to reply, “It depends!”, a good rule of thumb is to expect to make a down payment equal to 20% of the price. The remaining balance of 80% can then be financed by the bank. Your down payment can sometimes come from the value of a trade in too.
By having a conversation focused on CapX, the lender often benefits by gaining a better understanding of the business operations. Educating the lender on your business is never a bad idea! Similarly, the business owner can use these discussions to consider replacing or upgrading equipment and have a better understanding of the financial impact. A conversation with your banker focused on CapX is the perfect prescription to start planning of your business.