Choose your lender wisely

We are now entering what I expect to be the busiest quarter of what has already been a very active 2023. As manufacturing businesses continue to look for ways to add to their equipment mix, it’s important to know how to find the right lender.

Most business bank accounts are established at the same institution where the owner personally banks, but it may not be the best place for their commercial business. Canadian manufacturers are in a very specialized and competitive industry and, therefore, their lender needs to have a good understanding of the industry to provide proper service.

A few factors should be considered when you are seeking a lending partner.

1. Fast Approvals Come at a Premium

Regardless of the industry, it is normal to pay a premium for faster service. It’s no different in the lending world.

Getting approved for funding can be a very lengthy process, even if the source of the funds is your current bank. Whether it is preparing the required financial information documents or just tracking down a staff member that has the proper sign-off authority, it takes time.

In today’s world, particularly with limited machinery availability, time is of the essence once equipment is needed. Losing a machine because the financing is not in place is completely unacceptable.

When it comes to finding lowest cost of funds, there is no doubt a bank always will be cheaper when compared to a typical leasing company. Even though a leasing company is more expensive, the premium can be as small as a few hundred basis points.

However, and most importantly, a leasing company is able to respond quickly and can approve applications within a few business days.

I recently landed a new client because the bank where they had a long-standing relationship would not approve the loan application without making substantial changes to their operating line and insisted on charging a fee just to review the application.

Even if you have a great banking relationship, it’s still important to have options. I tell all my clients that just like they have more than one customer, they also should have more than one lender.

2. Multiple Funding Sources

It’s a good idea to work with a leasing company that has access to multiple funding sources. When several pieces of equipment are necessary, or if a machine requires expensive accessories or software, the costs may be significant and go beyond what any one lender can approve.

A leasing company that has access to multiple funding sources can break down the application and send portions of it to different sources. So, instead of needing one funder to approve $250,000, the leasing company can fund the machine for $175,000 with Source A, a programmable steady rest for $50,000 with Source B, and software for $25,000 with Source C.

This is a strategy that I have implemented over the years to get my clients multiple pieces of equipment, and, in some cases, quadrupled their borrowing capacity by doing so.

3. Delayed Payment

In most cases, a bank only will release funds when the equipment is delivered. However, typical equipment sellers want to collect step payments from the order date, which usually includes a substantial deposit, an installment payment when the equipment ships, and then a small balance upon delivery or installation.

A leasing company can handle the step payments, but your bank likely will hold you responsible for bridge payments until the equipment hits your floor.

If the machine is a factory order because there is no inventory, which these days is quite likely, there could be a significant lag between the release of a large deposit at the time the order is placed and when the machine is installed.

An example of this occurred when a client of mine bought two CNC lathes with automation, which comprised a robot to load/unload parts along with a transport conveyor system. Once we had financing approval in place along with signed documents, we released the deposit and started the lease. The total cost was approximately $300,000 and the monthly payments were about $6,200. Essentially, we made the progress payments to the equipment seller while the client only had to pay monthly lease payments.

Order to delivery took about five months, so the customer made five monthly payments, which totalled $31,000 during this time. This was far easier for them to manage considering that the deposit alone would have been $90,000.

4. Financing Structure

The ability to modify your payment structure is an option when you lease equipment.

When a new piece of equipment is purchased, it takes time to install, set up, program, and debug before it starts producing parts. What a leasing company can potentially offer is a program that defers payments for a few months until the machine is up and running, and, most importantly, generating revenue.

This flexibility also can be used when a borrower has been approved for 80 or 90 per cent of the transaction that requires a deposit for the rest. A competent leasing company can structure the transaction so the deposit is paid over the first 6 to 12 months of the lease, as opposed to upfront, which alleviates any additional stress on working capital.

A leasing company that specializes in the manufacturing industry understands how shops operate and can even arrange a skip payment. The first three monthly payments (or more) will be minimal, maybe only a few hundred dollars per month. This provides a manufacturer with valuable time to get the machine running optimally, while it is not generating revenue, without the pressure of making full payments.

When choosing a lender, consider some of the other factors beyond just the cost of funds. There are lots of options in the marketplace, but it is quite possible there are only a few really good fits for your business.

Ken Hurwitz is vice-president of Equilease Corp., 416-499-2449, ken@equilease.com, www.equilease.com.