Taking the Next Step in Your Small Business With Capital Investments

Published by BradyRenner CPAs | September 6, 2023

A man hand holding coin over stacked coins in glass jar and growing tree plant depicts Fund growth and wealth.

Throughout the life cycle of your small business, you will be faced with making a myriad of financial decisions. While many of these will involve one-time decision points that will only require a few tweaks throughout the existence of your business, others – like how to handle capital investment opportunities – will need to be fully evaluated every time they occur.  Investing in your small business requires careful planning and analysis in order to maintain your its financial health and stability, and you will need to analyze capital investment opportunities as they arise.

What are Capital Investments?

When you spend money on your business that will add long term value instead of immediate value, this is known as a capital investment. 

Some examples of capital investments include: 

  • The physical location of your business, including any land or buildings, as well as any construction costs. Additionally, major landscaping improvements such as retaining walls are also considered capital investments, as are other improvements with usefulness beyond one year’s time. 
  • Furniture and other fixtures, including electronic equipment, for your business
  • Vehicles for dedicated use by your business
  • Software purchases
  • Other companies or brands purchased by your business in an acquisition
  • Intellectual property purchased from another business, such as a patent 

Lease vs. Buy Analysis

For several types of capital investments – including the physical location of your small business – you will need to perform a lease vs. buy analysis. In your search for a location, you may encounter properties which the owner is willing to sell or lease. Additionally, you may have many options to choose from for your physical business location: some for sale, some for rent. There are many factors to consider in choosing which works best for your business.

Leasing a property for your business is cheaper in the short term yet more expensive long term. Your first step in making this decision is a cash flow analysis of each scenario. 

This should include: 

  • Lease terms: Is the rent fixed, or will you be facing rent increases during the life of the lease? What deposits and fees are associated with the lease? Are there any restrictions on access to the property? Which repairs would you be responsible for and what maintenance is included in the lease? 
  • Purchase and financing terms: For purchasing property, you will need to know your interest rate, what your payments will be, any closing costs, the due dates of payments, and the life of the loan. 
  • Current real estate market trends: If the property is in an area with ever-increasing value, purchasing may be the better option in order to take advantage of potential gains when selling the property later on. 

There are other factors that you should also consider when making the choice between leasing or purchasing a property. 

You may wish to consider leasing a property if: 

  • You’re a newer business without a lot of credit and will have difficulty securing a mortgage. 
  • Your cash flow analysis is far more favorable for a leasing arrangement.
  • At this juncture, your business location needs are in flux: you want the flexibility of a lease in order to move to either larger or smaller quarters.
  • There are no ideal properties for sale at this time.
  • The real estate market is in decline and now is not a smart time to purchase property. 
  • Your business is not in a position to assume maintenance duties. 

You should consider purchasing property if:

  • Your company is in a financial position to consider the long term savings of purchasing versus leasing. Generally speaking, over the life of your business, owning the property is less expensive, so if you are able to do so, purchasing is advantageous.
  • There are specific tax advantages to purchasing the property. Depending on several factors that can be evaluated by your tax professionals, purchasing may reduce your tax bill.
  • You need autonomy. If being independent of a landlord making decisions for the property is necessary to the success of your business, purchasing a property puts you in charge. 
  • There are no suitable rental spaces currently available. 
  • You’re “in the know” about increasing property values in an up and coming neighborhood, and purchasing property is a solid investment in your company’s future.

Say you are an existing retail business that finds itself in need of a new location. Your commercial real estate agent has found five properties for you to consider within your proposed budget: two rental properties, two properties for sale, and one property that is either for sale or lease. You review the properties and narrow your choices to the property that can be for lease or sale, and now you must choose which option fits your business’s budget and needs. 

This is where BradyRenner’s CPAs prepare a lease vs. buy analysis specific to your business as well as the proposed location. Using detailed financial information including a cash flow analysis, your combined federal and state tax rate, and other financial information, BradyRenner will provide you with the information you need to make the right decision. 

The CPAs at BradyRenner have decades of combined experience and are ready to help during this next step in building your small business. They will use their deep understanding of your business’s financial state and needs, and their lease vs. buy analysis experience to support you in planning your capital investments wisely. 

Come back for the fourth article in this series, where we’ll be taking a look at cost management, profitability analysis, pricing strategy, and break-even analysis as important ongoing financial steps for a small business to take.