Use Your Existing Equipment ... As Collateral

Struggling to manage working capital is the business issue I consistently hear about most from my customers, but what many business owners don’t know is the existing equipment on the floor can help fight this battle.

Most people assume a busy manufacturer is flush with cash and that owners and shareholders spend most of their days counting it, but in fact, the opposite usually is the case. A busy shop has huge expenses, which include significant layouts for material, tooling, labour, rent, and utilities, all of which are paid biweekly or monthly.

However, the company’s final product, and therefore profits, gets paid for in 30 (or in most cases 60 to 90) days after delivery. This essentially means the costs are paid long before the profits are collected.

And when a manufacturer lands a new job requiring a new piece of equipment, it must pay a deposit to the seller, which means the pressure on working capital is magnified. This is where understanding the value already on the manufacturing floor can provide some relief.

Know Your Assets

An asset-based lender, one who has experience in the manufacturing industry, will recognize that a good, brand-named machine tool that has been paid for in full, is an asset that can be leveraged. The equipment is used to provide collateral for financing new machinery, or as a resource to raise working capital to cover the additional costs of product development using existing equipment.

However, this means the owner needs to understand how existing equipment is evaluated and how it can be leveraged.

Evaluating used machinery involves understanding and grading several key factors.

Manufacturer and Class. There are many different builders of machinery and equipment, all of which have their place in the market, but it is how they are perceived that will assist in establishing value.

An appraiser looks at the approximate number of existing installations and whether those machines, if they have been properly maintained, will hold tolerances over time. The appraiser also looks at who is providing technical support and spare parts. It is possible for a piece of equipment to have an excellent reputation, but if you can’t find anyone credible to provide parts and service, the value of the machine will be reduced significantly.

Model and Age. In many cases, the owner may not know the exact details about the equipment, but if the machine can be inspected in person, finding the model and age is relatively easy. It normally is stamped on a plate attached to a major component of the machine, such as a column, table, or electrical panel.

Once this information is confirmed, and assuming the manufacturer has a stable representation in the market, the equipment can be researched.

Usage. This is very important because the same machine model can be used to manufacture a variety of parts across a great number of industries, and there are plenty of differences among manufacturing environments.

Two machines of identical age can have vastly different values depending on how they have been utilized.

Most machines are run roughly 2,000 hours per year, which is known as one shift (eight hours per day, five days per week for one year). However, the largest customer base for machine tools in Canada is the automotive industry, which is known to run machines much harder, often for two or three shifts. This means two identical machines of the same age will be valued quite differently to account for the additional usage.

Condition. A machine tool is designed to manufacture parts to very tight tolerances, in many cases microns. To function properly over long periods of time, they require regular maintenance no different than any other mechanical asset.

The amount of maintenance a machine requires is related not only to its usage, but also to the type of material it has been cutting. A piece of equipment that has been cutting aluminum, a light material that is easy to machine, will be in significantly better condition (and therefore worth more) than an identical machine that has been cutting cast iron, a very abrasive material that produces chips known to cause long-term damage.

Replacement Cost. In many cases, particularly for older equipment, it is tough to determine the original selling price, so the next place to look is replacement cost.

In many instances, however, a replacement cost may not be so easy to find, and this too will have an impact on value. For example, the model may no longer be manufactured because it was redesigned or upgraded. It could also be that the model didn’t sell well because of its price and therefore was dropped from production. There are myriad reasons why finding a replacement cost can prove difficult, so it’s best to get an expert opinion.

Researching a piece of equipment is relatively easy, if it is a popular machine tool built by a well-established manufacturer. Finding a similar machine can be done with a simple Internet search. However, finding a quote for a similar machine and using it exclusively as the basis for value is inappropriate.

Most customers show up at my door because they are busy and need equipment, but are just not in a position to purchase equipment using their working capital. Other clients simply need money to develop a new product or process but cannot finance it with internal resources.

In both cases they usually have plenty of equipment on the floor that was paid for long ago that can be useful. Regardless of why they need funds, they can use this equipment to raise the required capital, especially if it’s a well-known, brand-named machine.

Ken Hurwitz is senior account manager, Blue Chip Leasing Corp., 416-614-5878, www.bluechipleasing.com.