Seasoned business owners understand the power of financial leverage. This is particularly important for manufacturing companies, which require a significant investment in equipment, inventory and raw materials before they can start making sales. Often the key to success is to spend as little working capital as possible on these expenses, thus preserving cash flow for the actual operation of the business. When used properly, financial leverage can help any company achieve positive cash flow.
Two kinds of leverage are beneficial to companies of all types: equipment leasing and factoring. When used together, leasing and factoring provide a powerful combination and strategy for companies to achieve continued growth.
Equipment leasing and financing allows you to spend minimal upfront expenses and then make monthly payments on the equipment, for a typical term of 36 to 60 months. When the lease finance is complete, you can own the equipment with a nominal buyout of $1.00. Also, because a lease is expensed, rather than capitalized, there are tax benefits to leasing compared to paying cash. So in essence, equipment leasing and financing helps companies manage cash more effectively. If this wasn’t the case, why do so many Fortune 500 companies lease their equipment?
Factoring is also a very important cash flow management tool. In the same way that it is not smart to use working capital to buy equipment, it also doesn’t make sense to carry your accounts receivable, particularly for slow-paying client that may not pay for 90 days or longer. By using factoring, businesses speed up their cash receipts while also outsourcing credit and collections, thus freeing up owners and managers to spend more time generating new business.
Over the years our experience has been that most manufacturing businesses will eventually reach a threshold where they can’t grow any more due to a lack of capacity. Equipment leasing and financing and factoring can help companies expand beyond this limitation. It can be much easier to manage a business financially by using leasing and factoring together, because all you have to do is concentrate on your margin. Your cost to lease and operate a machine is fixed each month, along with your factoring cost, so it’s easy to set prices that ensure the level of profitability you desire. Your goal is to create a scenario, in which the business is virtually cash-flowing itself, and you can keep growing as fast as you can sell products; we feel this is the optimal position to be in.