With the recent recession still fresh in their minds, many businesses are reluctant to take large risks in capital improvement and expansion. However, if your company is considering capital expansion, there are some elements in your favor. Interest rates remain attractive and with the Fed indicating it will keep rates low through 2014, we are experiencing historic lows in cost of capital. With variable rate debt in the three percent range and likely to remain there over the next three years, as stated by Federal Reserve Chair Ben Bernanke, it is a great time to borrow money. Why not take advantage of that?
While lending criteria tightened significantly in late 2008 through 2010, some recent signs show easing, albeit not to the pre-recession levels of easy credit. Companies with a reasonably good track record can find banks willing to give them credit. In some cases, it may require some extra work and preparation. If your earnings history is a little checkered, then a recent uptrend in profits accompanied by at least a couple of years of tightly crafted projections likely will be required.
Additionally, tax laws remain favorable for depreciation. In 2011, capital expenditures for new equipment and certain leasehold improvements could be deducted dollar for dollar (100-percent bonus depreciation). In 2012, this bonus depreciation is reduced to 50 percent but is still a significant tax benefit and worth considering if your company is contemplating equipment purchases in the near term.
Finally, small businesses in this country drive job creation and career opportunities. The Small Business Administration has a host of programs to support small businesses in obtaining loans from lending institutions. Many banks have departments specializing in making SBA-type loans, which provide partial guarantees to the bank to support the credit. These loans may be helpful for small businesses that are otherwise having difficulties in securing credit. Under certain SBA programs, businesses can secure up to $5 million in loans.
Companies in a position to capture market share and grow their businesses may find this to be an attractive time to consider borrowing money. If you can make the business case to acquire that new piece of equipment to create significant efficiencies or add much-needed capacity to improve your company’s profitability, there may be no better time to borrow money than in today’s low interest rate, tax friendly environment.