I find it intriguing that many business owners need help with debt verses cash decisions because in this economy “cash is king.” The question I’m often asked by business owners is should I pay cash or finance the piece of equipment I want to purchase for my business? And some CEOs anxiously come to me saying I have extra cash this month. So should I use my cash to pay down my long-term debt?

Well the answer is most of the time a simple response. No. Keep your precious cash to take advantage of supplier discounts and fund strategic projects in your firm. You may need your cash to hire a new employee or pay for training costs which could make your staff more efficient. And a strategic project, lower inventory prices or service efficiencies, new employee, or better trained team in turn could dramatically lower your direct costs which would have a bigger positive impact on your company’s profitability.

You know that paying down long-term debt faster won’t improve your business profitability. Right? And using cash in this way has a negative impact on your cash position.

You need to first thoroughly understand your market and how supply and demand factors may shift from month to month and year over year in your markets before financing or spending cash. Macroeconomic conditions and microeconomics in your local market can be another factor which will influence your decision to finance or dole out cash. The current and future economic trends for sure play a role in my determinations as a financing professional to move forward with your funding request.

It is something I’d definitely include in my lending analysis before recommending you to a funding committee.

Now business debt includes current liabilities and long-term liabilities. I’m sure I don’t need to tell you that you must pay your current liabilities every month. Avoid late fees and take advantage of supplier discounts for paying early. Current liabilities include credit card payments, rent, workers compensation payments, etc.

But using cash to pay off long-term debt or to purchase equipment can be foolish. Hold onto your cash for more strategic purposes, to survive a temporary slow down in customer demand, and to take advantage of discounts from your suppliers.

Cash Flow Is King

As long as your cash flow from operations covers your principle and interests payments, you should leverage financing or lease equipment when possible.

Without getting too technical, you need to know whether outlaying a large sum of cash will throw your “current ratio” out of whack. So you need to make sure your “current ratio” stays align with industry standards and with your local market. The “current ratio” is what I use as your lender to measure your ability to pay off debt with your current assets.

Now another very important ratio I rely on to measure your ability to pay back debt on-time is the “debt to equity ratio.” This ratio helps me to verify how much “skin you have in the game” to pay back your current long-term debt and any future debt which would be added to your capital structure. Cash purchases and equity draws could put your business in a bind when it comes to future financing or investor capital, depending on the cash outlay and other debt on your balance sheet.

And just because your net income is positive and even substantial, you may not have the actual cash in reality. Yes, financial statement analysis is sometimes very tricky. For this reason, cash flow analysis is also another key step in deciding whether to payoff debt, purchase assets in cash, or finance or lease.

In short, I would say that before making large cash purchases or pay down long-term debt that you must perform financial and sensitivity analysis to know how using large sums of cash and/or signing on for additional debt financing will affect your immediate and near term business risks.

Why Do You Need Help With Debt Vs. Cash Decisions?

Well you don’t want to end up in a cash strapped position. Right? You know my financial company provides financing for equipment, commercial property, and business lines of credit. I can help you clarify your debt verses cash decisions.

Get expert advice. Sign-up for a complementary Help With Debt Vs. Cash Financing session with me today. And I will address your specific concerns with your debt verses cash decisions.

You can check out my complementary Business Survival Report which gives you an overview of the financing options you have as a business owner or commercial property investor.

When it absolutely, exactly has to be right.