Financing a Turnkey System

When I started in this business in the early ’90s, I was working for my family business, importing and distributing Japanese machine tools. Because we were selling high-end equipment, we had a full complement of service technicians as well as application engineers to support our sales staff, similar to what you will find at any of the current sellers of machinery and equipment.

For the most part we sold stand-alone machines, but on more than a few occasions customers were looking for additional services beyond simply delivering and setting up a machine, and one of those services was offering turnkeys.

The term turnkey refers to a system that is ready for immediate use. The word is a reference to the fact that the customer, upon receiving the product, just needs to turn the ignition key to make it operational, or that the key just needs to be turned over to the customer.

For us this meant supplying a complete cell capable of running finished parts, including design and programming of the part, automation, fixturing, tooling, and, of course, the machines.

Deposit Required

Now when you consider the scope of work required to supply such a service, I can tell you firsthand it is considerable; and therefore, the associated costs also were considerable.

However, there was another issue surrounding the selling of these turnkey systems: How did we want to get paid? Typically, we required a fairly large deposit. We took 30 per cent with the order, and that covered our commitments for the equipment, tooling, and accessories required to make the system work, because those suppliers would also expect deposits.

We then started the engineering work and prepared programs, drawings, and system designs. Once these tasks were completed, we expected another 30 per cent upon design approval.

The next step was to actually put the system together on our floor and do a full run-off for the customer to demonstrate the system was, in fact, capable of manufacturing finished parts within the defined tolerances. Once that was completed, we again invoiced for another 30 per cent.

The final 10 per cent was payable once the system was delivered and functioning on the customer’s floor but, most importantly, 90 per cent had been paid before a single part was ever created.

The Financing Option

Now that I have been doing lease financing for more than six years, I can tell you one of the reasons that customers choose to finance their purchase, whether they are working with their own bank or with an alternative lender, is cash flow.

A manufacturer that is busy has a number of uses for working capital; it needs money for tooling, material, and wages, and it normally has customers who don’t always pay on time.

Then, when it comes time to add a piece of new machinery, or an entire system, to handle the extra work it has landed, the manufacturer finds it is nearly impossible to pull that kind of money out of working capital.

However, if the new machinery is financed as opposed to purchased outright, and the lender is familiar with and understands the industry, the manufacturer can put a loan or lease in place and, in turn, pay the seller directly.

Essentially the transaction is prefunded, meaning the lender will make the step payments to the seller and the manufacturer will just start the lease and make the regular monthly payments.

Once the transaction has commenced, the only payments the manufacturer is responsible for are the ones that are made while the system is being prepared, as opposed to having to lay out large amounts for the purchase price.

A real-world example of this is one of our good customers that bought two CNC lathes with automation, which comprised a robot to load/unload parts along with a conveyor system.

Once we had an approval along with signed documents, we released the deposit and initiated the lease. The total cost was approximately $300,000, and the manufacturer’s monthly payments were about $5,000. We also made some progressive payments as the cell’s supplier received design approval, performed run-off on the seller’s floor, and then performed run-off on the manufacturer’s floor.

The time from order to the time of delivery and acceptance was about five months, so the manufacturer made five monthly payments totalling $25,000 during the build time, which was far easier to manage than the deposit alone to buy the equipment, which would have been $90,000.

The reality was that more than a few factors had to be addressed for us to be in a position to get this done for our customer. We needed to ensure the credit was supportive, which it was; the lender needed to have confidence in the seller -- in this case one of the most established dealers in Canada; and the lender had to understand the industry and be prepared to prefund the transaction.

There is no doubt that, regardless of size or balance sheet, all manufacturers struggle with cash flow, so they should explore every avenue for investing in new equipment without having to the pull the money from working capital.