A new contract lands, the order book grows, or a customer wants more capacity than the business currently has.
The obvious next step may be another machine, vehicle, forklift, piece of plant or specialist equipment.
The less obvious question is what happens to working capital after the asset is purchased.
For a Smeaton Grange business, growth can create two funding needs at once.
One is the equipment itself.
The other is the cash required to operate the expanded business around it.
That second requirement is easy to underestimate.
The asset may only be part of the cost of taking on more work
Suppose a business wins additional work that justifies buying a $120,000 piece of equipment.
The purchase may look straightforward.
But the extra contract could also require:
additional employees
more fuel
larger material purchases
more subcontractors
higher insurance costs
additional servicing
transport or delivery costs
more stock
deposits for suppliers
extra administration
If the owner uses most available cash as a large deposit on the equipment, there may not be enough left to support the work the asset was purchased to perform.
The business has solved the capacity problem but created a liquidity problem.
Buying equipment outright can be expensive in a different way
Paying cash avoids finance repayments.
That can sound attractive.
But cash used to purchase a long-life asset is no longer available for short-term operating needs.
A business may have $250,000 in reserves and feel comfortable paying $140,000 for equipment.
After the purchase, however, the remaining cash may have to cover:
payroll
materials
suppliers
tax
rent
freight
customer payment delays
If the new work takes several weeks or months to generate cash, the business can become tight even though it owns the asset outright.
The commercial question is therefore not only:
“Can we pay cash?”
It is:
“What does paying cash prevent us from doing afterwards?”
Asset finance and working capital solve different problems
One useful way to structure growth is to separate the long-term asset from the short-term operating requirement.
The equipment may be used for several years.
Wages and materials may be consumed within weeks.
Those costs do not necessarily belong in the same finance facility.
Depending on the circumstances, eligible equipment may be financed through asset finance while working capital is used to support the operating costs associated with the increased workload.
That can help preserve cash for the part of the business that changes most quickly.
The new asset may need to earn before it pays for itself
Businesses often calculate whether an equipment purchase is worthwhile by looking at expected additional revenue.
That is important.
But timing matters just as much.
The equipment may be delivered this month.
Repayments may start shortly afterwards.
The contract it supports may not produce customer cash for 30, 45 or 60 days.
That creates a temporary gap.
For example:
Equipment repayment begins in October.
Two new employees start at the same time.
Materials are purchased upfront.
The customer is invoiced at the end of November.
Payment arrives in January.
The project may still be profitable.
But the business has to carry several months of extra costs before the cash catches up.
More capacity can create more stock and materials pressure
Equipment purchases often trigger a second-order requirement.
A machine can process more work.
A vehicle can make more deliveries.
A forklift can support a larger warehouse.
A production asset can increase output.
That usually means the business also needs more of whatever feeds the asset.
For a manufacturer, that may be raw materials.
For a contractor, it may be job materials.
For a wholesaler, it may be more stock.
For a service business, it may be more labour.
If the finance plan covers only the asset and not the increased working capital requirement, the business may have more capacity than it can afford to use.
A deposit can create unnecessary pressure
Some businesses contribute a large deposit because they want to reduce the amount financed.
That can lower repayments.
But a larger deposit is not always the best outcome if it weakens the operating account.
Suppose the business is buying a $180,000 asset.
It could contribute $60,000 and finance $120,000.
Or it could contribute $20,000 and preserve an additional $40,000 of cash.
The second structure may result in higher repayments, but it may also leave the business with more room to fund wages, materials and supplier commitments.
The better structure depends on the overall cash position, not simply the desire to minimise the loan amount.
Growth should be funded around the cash cycle
Before committing to new equipment, it can be useful to map the complete growth cycle.
Ask:
When does the equipment need to be paid for?
When will it be operational?
When do additional labour and materials start?
When can the business invoice the customer?
When is payment actually expected?
How much cash needs to leave before the first extra revenue arrives?
That number is often more useful than the equipment purchase price alone.
Invoice finance may support the back end of the growth cycle
If the new work is sold to business customers on payment terms, cash may become tied up in receivables after the work is completed.
This can create a second funding gap.
The business has already paid for:
wages
materials
subcontractors
equipment repayments
but is still waiting for the customer to settle the invoice.
Where eligible business-to-business invoices are involved, invoice or debtor finance may be worth considering.
That can help bring forward part of the cash tied up in receivables and support the next round of work.
Bigger equipment can mean bigger contracts, and bigger gaps
A business that increases capacity may quickly start bidding for larger work.
That is often the whole point.
But larger contracts usually require more working capital.
A $20,000 monthly customer may be easy to fund.
A $150,000 project may require substantial cash before the first payment arrives.
This means the business should assess not only whether it can afford the asset, but whether it can afford the scale of work that the asset is expected to unlock.
Growth can fail financially even when demand is strong if the working capital requirement expands faster than the business’s cash reserves.
Existing debt can affect how much room the business really has
A business may already be servicing:
vehicle finance
equipment finance
business loans
an overdraft
credit cards
tax arrangements
Adding another asset can be appropriate, but the total repayment burden should be considered.
If existing facilities are already consuming a large part of monthly cash flow, a broader review may be worthwhile before adding new debt.
Sometimes the better opportunity is not simply financing the new equipment.
It may also involve restructuring existing facilities so the business has enough room to support the growth the new asset is expected to create.
The busiest part of the year can magnify the problem
If the equipment purchase is made between September and December, the business may already be dealing with higher stock levels, increased payroll, supplier commitments or a seasonal increase in customer demand.
That can make the working capital requirement larger than normal.
At the same time, some customer payments may move into January.
The business should therefore test the purchase against the likely year-end cash position.
Will the business still have enough liquidity after:
the deposit
the first repayments
additional payroll
extra materials
supplier accounts
tax obligations
have all been paid?
If not, the structure may need to change.
Do not let the asset consume the cash needed to make it productive
If a Smeaton Grange business is buying equipment to take on more work, it can be useful to look at the asset and the operating requirement together.
Thrive Broking can review the proposed equipment purchase, deposit, working capital requirement, existing finance commitments and customer payment cycle.
Depending on the circumstances, the structure may involve asset finance, working capital, invoice finance or a combination of facilities.
The aim is not simply to get the equipment approved.
It is to make sure the business still has enough cash to put that equipment to work once it arrives.