{"id":201369,"date":"2025-08-26T14:00:15","date_gmt":"2025-08-26T21:00:15","guid":{"rendered":"https:\/\/www.nationalfunding.com\/blog\/?p=201369"},"modified":"2025-08-26T14:32:13","modified_gmt":"2025-08-26T21:32:13","slug":"what-are-capital-expenditures-for-small-businesses","status":"publish","type":"post","link":"https:\/\/www.nationalfunding.com\/blog\/what-are-capital-expenditures-for-small-businesses\/","title":{"rendered":"What Are Capital Expenditures for Small Businesses?"},"content":{"rendered":"<p><span data-contrast=\"auto\">Capital expenditures (called CapEx for short) are business investments in assets that last more than one year including improvements and upgrades of existing assets. These can be physical assets like equipment or intellectual property.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Here are some examples of what can be considered capital expenditures:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Equipment and machinery<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Buildings<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Land<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">Vehicles<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"5\" data-aria-level=\"1\"><span data-contrast=\"auto\">Furniture<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"6\" data-aria-level=\"1\"><span data-contrast=\"auto\">Computers and servers<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"7\" data-aria-level=\"1\"><span data-contrast=\"auto\">R&amp;D for patents and other intellectual property\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"8\" data-aria-level=\"1\"><span data-contrast=\"auto\">New HVAC system<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"Helvetica Neue\" data-listid=\"3\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"9\" data-aria-level=\"1\"><span data-contrast=\"auto\">Laying fiber optic cable\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">CapEx is different from operating expenses because the capital expenditure purchases an asset for the business, whereas operating expenses are simply costs to run the business this year. Purchasing manufacturing equipment is a capital expenditure, but maintenance to keep the machines running is an operating expense. That\u2019s why <\/span><a href=\"https:\/\/www.irs.gov\/pub\/irs-prior\/p535--2022.pdf\"><span data-contrast=\"none\">businesses depreciate CapEx over multiple years<\/span><\/a><span data-contrast=\"auto\"> but immediately expense operating costs.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Capital expenditures also mean that a business purchases the asset instead of renting it. Here&#8217;s what this looks like. You can use an <\/span><a href=\"https:\/\/www.nationalfunding.com\/equipment-leasing\/\"><span data-contrast=\"none\">equipment financing loan<\/span><\/a><span data-contrast=\"auto\"> to buy a new semi-truck and that would be CapEx, but leasing it (where you have the option to purchase it or give it back to the leasing company after a period) would be an operating expense.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><span data-contrast=\"auto\">To see the difference between capital expenditures and operating expenses for your business, start by gathering your financial statements including your balance sheet, income statement, and statement of cash flows.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h2 aria-level=\"2\"><span data-contrast=\"auto\">Finding Capital Expenditures on Your Financial Statements<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:240,&quot;335559739&quot;:240}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">Capital expenditures show up in 3 places on your financial statements:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">On your balance sheet under Property, Plant, &amp; Equipment (PP&amp;E) because CapEx purchases are business assets<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Under the Investing Activities section of your cash flow statement to show the outflow of cash from the business to buy the asset<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"2\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">As depreciation expense on each year&#8217;s income statement<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><span data-contrast=\"auto\">Depreciation represents the<\/span> <span data-contrast=\"auto\">cost to your business for the asset wearing down and losing value over time. Even though it doesn&#8217;t take any cash, you deduct depreciation each year as an expense. This reduces the value of your asset on the balance sheet by the amount of depreciation.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">If you use a loan to purchase CapEx, the interest expense from the loan gets deducted from your income statement in addition to the depreciation expense.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h3 aria-level=\"3\"><span data-contrast=\"none\">Quick CapEx Calculation<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:320,&quot;335559739&quot;:80}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">Instead of adding up individual receipts for assets you bought this year, use this formula to quickly calculate CapEx:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"1\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">PP&amp;E at end of this year (from your balance sheet) &#8211; PP&amp;E at end of last year (from last year\u2019s balance sheet) + Depreciation Expense (from this year\u2019s income statement)<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">If you ended last year with $1 million in PP&amp;E, ended this year with $1,200,000 and had depreciation expense of $100,000, then your CapEx this year was $300,000 = $1.2 million &#8211; $1 million + $100,000.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Depending on your business and when you purchased different assets, that might be a high number or a low number, so here\u2019s how to budget and compare CapEx for your business.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h2 aria-level=\"2\"><span data-contrast=\"auto\">How Much to Spend on Capital Expenditures<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:360,&quot;335559739&quot;:120}\">\u00a0<\/span><\/h2>\n<p><span data-contrast=\"auto\">How much you should spend on capital expenditures depends on the assets you already have, whether they can produce enough to meet your business forecast, and what your financial situation looks like.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Start by setting aside two months of fixed costs in cash reserves to make sure you have a safety net for rent, wages, and other must-pay expenses. Next, follow this 3-step process to figure out what you can spend on capital expenditures:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ol>\n<li><span data-contrast=\"auto\">Create two lists:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ol>\n<ul>\n<li><span data-contrast=\"auto\">Replacement capital expenditures<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li><span data-contrast=\"auto\">Growth capital expenditures<\/span><\/li>\n<\/ul>\n<p><span data-contrast=\"auto\">2. Stress test debt levels.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">3. Compare available debt service levels to capital expenditure needs.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h3 aria-level=\"3\"><span data-contrast=\"none\">Two Capital Expenditures Lists<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:320,&quot;335559739&quot;:80}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">Create two lists for CapEx with one list for expenditures to replace aging assets and another for new assets to grow your business.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"7\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Replacement CapEx is a matter of <\/span><i><span data-contrast=\"auto\">when<\/span><\/i><span data-contrast=\"auto\"> versus <\/span><i><span data-contrast=\"auto\">if<\/span><\/i><span data-contrast=\"auto\"> because your assets wear down over time, so you need to upgrade or replace them to keep the same level of production\/sales. For example: Older machines won\u2019t keep up with the same level of production forever, aging vehicles break down, and even intellectual property loses power over time.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"7\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Growth CapEx is the list of assets to increase your productivity and revenue.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Because replacing old machines with new ones can grow your business with increased production or better productivity, you\u2019ll be able to factor growth rates into the next step where you stress test the debt levels for your current financial position. This tells you how much (if any) extra debt your business can afford without risking bankruptcy in case growth doesn\u2019t meet expectations.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h3 aria-level=\"3\"><span data-contrast=\"none\">Stress Test Debt Levels<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:320,&quot;335559739&quot;:80}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">This 4-step process stress tests your future debt levels to tell you how much (if any) additional debt your business can afford for capital expenditures. The goal for the test is to keep your <\/span><a href=\"https:\/\/www.nationalfunding.com\/blog\/how-debt-service-coverage-ratios-apply-to-loans\/\"><span data-contrast=\"none\">debt service coverage ratio<\/span><\/a><span data-contrast=\"auto\"> above 1.25, which is the minimum level most lenders require for new loans:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ol>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Add up your total debt service payments including monthly principal and interest payments.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">From your most recent annual income statement, add together these numbers:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Net income<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Interest expense<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Tax expense<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Depreciation &amp; amortization<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Divide the result from step 2 by 12 to get a monthly number. Then divide by 1.25.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<li aria-setsize=\"-1\" data-leveltext=\"%1.\" data-font=\"\" data-listid=\"6\" data-list-defn-props=\"{&quot;335552541&quot;:0,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[65533,0],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;%1.&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Subtract the number in Step 3 from the result in step 2 and that is your available monthly cash flow to service new debt before you drop below what most lenders require.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ol>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><span data-contrast=\"auto\">Here\u2019s an example calculation using the hypothetical income statement in the table below:<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"1\" data-aria-level=\"1\"><span data-contrast=\"auto\">Step 1: Assume the monthly principal and interest payments are $6,600 for this example.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"2\" data-aria-level=\"1\"><span data-contrast=\"auto\">Step 2: From the table below, $439,000 + $188,000 + $23,000 + $50,000 = $700,000.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"3\" data-aria-level=\"1\"><span data-contrast=\"auto\">Step 3: $700,000 \/ 12 = $58,333 \/ 1.25 = $46,666.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<ul>\n<li aria-setsize=\"-1\" data-leveltext=\"\u25cf\" data-font=\"\" data-listid=\"4\" data-list-defn-props=\"{&quot;335552541&quot;:1,&quot;335559685&quot;:720,&quot;335559991&quot;:360,&quot;469769242&quot;:[8226],&quot;469777803&quot;:&quot;left&quot;,&quot;469777804&quot;:&quot;\u25cf&quot;,&quot;469777815&quot;:&quot;multilevel&quot;}\" data-aria-posinset=\"4\" data-aria-level=\"1\"><span data-contrast=\"auto\">Step 4: $46,666 &#8211; $6,600 = $40,066.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/li>\n<\/ul>\n<table data-tablestyle=\"Custom\" data-tablelook=\"0\" aria-rowcount=\"8\">\n<tbody>\n<tr aria-rowindex=\"1\">\n<td data-celllook=\"69905\"><strong>Income Statement for Example\u00a0<\/strong><\/td>\n<td data-celllook=\"69905\"><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"2\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Revenue<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$2,000,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"3\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Cost of Goods Sold<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$1,000,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"4\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Operating Expenses<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$300,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"5\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Depreciation<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$50,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"6\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Interest Expense<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$23,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"7\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Taxes<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$188,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<tr aria-rowindex=\"8\">\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">Net Income<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<td data-celllook=\"69905\"><span data-contrast=\"auto\">$439,000<\/span><span data-ccp-props=\"{&quot;134245417&quot;:false,&quot;201341983&quot;:0,&quot;335559740&quot;:240}\">\u00a0<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p><span data-contrast=\"auto\">In this situation, you can cover another $40,000 in debt payments and keep a debt service coverage ratio above 1.25 to satisfy lenders. If you\u2019re thinking about growth CapEx, start with a safer ratio of 1.5 in case sales don\u2019t come in as fast as you thought. In this example, replace the <\/span><i><span data-contrast=\"auto\">\u201c1.25\u201d<\/span><\/i><span data-contrast=\"auto\"> with <\/span><i><span data-contrast=\"auto\">\u201c1.5\u201d<\/span><\/i><span data-contrast=\"auto\"> and the formula indicates that you can manage another $32,289 in monthly debt payments on top of your existing $6,600.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<h3 aria-level=\"3\"><span data-contrast=\"none\">Compare Available Cash Flow to Needs<\/span><span data-ccp-props=\"{&quot;134245418&quot;:true,&quot;134245529&quot;:true,&quot;335559738&quot;:320,&quot;335559739&quot;:80}\">\u00a0<\/span><\/h3>\n<p><span data-contrast=\"auto\">The final step is comparing the available cash flow from step 2 to the potential monthly payments for items on your lists in step 1.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">If you\u2019re thinking about a new $3 million headquarters facility purchased with a 10-year mortgage at 8%, monthly payments would come out to about $36,000. That\u2019s more than the <\/span><i><span data-contrast=\"auto\">\u201csafe\u201d<\/span><\/i><span data-contrast=\"auto\"> $32,289 and almost all of the $40,000, so you wouldn\u2019t be able to replace other aging assets much less fund growth capital expenditures with a <\/span><a href=\"https:\/\/www.nationalfunding.com\/small-business-loans\/\"><span data-contrast=\"none\">small business loan.<\/span><\/a><span data-contrast=\"auto\">\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Alternatively, if new machines costing $1 million allow you to capture excess demand, growing revenue by 5%, a 10-year 10% equipment financing loan would take up $13,215 in monthly debt service. And that would leave plenty of room to cover other needs from the lists you created in step 1. On top of this, the 5% revenue growth adds almost another $50,000 to operating cash flow, so you\u2019d have a sizable buffer in your debt service ratio.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><b><span data-contrast=\"auto\">Pro-Tip<\/span><\/b><span data-contrast=\"auto\">: Leverage <\/span><a href=\"https:\/\/www.nationalfunding.com\/blog\/choose-between-debt-and-equity-financing\/\"><span data-contrast=\"none\">equity financing, which is different from debt financing<\/span><\/a><span data-contrast=\"auto\">, to fund replacement and growth capital expenditures, too. Equity financing helps spread the risk for growth capital expenditures, while debt financing can fund replacement assets.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Ultimately there\u2019s no <\/span><i><span data-contrast=\"auto\">\u201cright\u201d<\/span><\/i><span data-contrast=\"auto\"> amount of CapEx to spend. It all comes down to which assets you need to replace to keep the business running and then what you\u2019d like to buy for future growth.<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Capital expenditures are business investments for long-lived assets lasting over one year. They\u2019re necessary to keep a business running by replacing old and out-of-date assets, and you\u2019ll also need them for growth. How much you spend each year depends on your financial situation, how much cash flow you have to service debt or if you can get outside equity investment, and how much the assets cost.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">Whether you\u2019re a software company that only needs CapEx for computers and servers or a long-haul trucking company that needs capital for trucks, trailers, and warehouses, National Funding offers all <\/span><a href=\"https:\/\/www.nationalfunding.com\/who-we-serve\/\"><span data-contrast=\"none\">types of business loans for numerous industries<\/span><\/a><span data-contrast=\"auto\">. Apply online today to see what we can do for your business.\u00a0<\/span><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">National Funding <\/span><i><span data-contrast=\"auto\">does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.<\/span><\/i><span data-ccp-props=\"{&quot;134233117&quot;:false,&quot;134233118&quot;:false,&quot;335559738&quot;:195,&quot;335559739&quot;:195}\">\u00a0<\/span><\/p>\n<p><span data-ccp-props=\"{}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What are capital expenditures for small businesses? Learn how these investments work and pick up tips on finding the right spending level for your company.<\/p>\n","protected":false},"author":38,"featured_media":201368,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[88,97,222,87],"class_list":["post-201369","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-planning-for-growth","tag-accounting-for-small-business","tag-equipment-financing-and-leasing","tag-feature-post","tag-section-179-tax-deductions"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.8 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What Are Capital Expenditures for Small Businesses?<\/title>\n<meta name=\"description\" content=\"Here\u2019s what capital expenditures are, why they\u2019re different from operating expenses, their impact on your business finances, and how to budget for them.\" 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