Finance your turnkey manufacturing system

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When I started in the machine tool industry in the early 1990s, I was working for my family’s business importing and distributing Japanese equipment. To sell very expensive, high-end machine tools successfully requires a full staff of service technicians and application engineers to support the sales team and customers, something that you will find at any high-end machinery distributor today.

For the most part, we sold standalone machines. But on more than a few occasions, large manufacturers, particularly in the automotive sector, came looking for additional services, one of which is called a turnkey.

The term turnkey, generally used in the sale or supply of goods or services, refers to something that is ready for immediate use. The word is a reference for which the customer, upon receiving the product, just needs to “turn the key” to make it operational. For us this meant the end user was looking for a complete manufacturing cell capable of creating a finished product in a single setup, and usually included part design and programming, automation systems, fixtures, and tooling in addition to the machine(s).

Now when you consider the scope of work required to supply such a service, and I can tell you first-hand it is considerable, the cost associated is substantial and the payment structure complicated.

Payment Structure

Whether it was us back in the day or a seller today, the first requirement typically is a large deposit. We required a minimum of 30 per cent of the total cost of the turnkey system when the order was placed to cover our commitments for the equipment, tooling, and accessories necessary to make the system operational. This was because, in many cases, our own suppliers also required deposits.

We would then start the engineering work, prepare drawings and part programs, and design the system. Once this phase was completed, we invoiced our customer another 30 per cent pending design approval.

The next step was to assemble the system on our floor and arrange a full run-off for the customer to demonstrate the system was capable of manufacturing finished parts within the agreed upon parameters, such as cycle time and tolerances.

Once the run-off was completed and accepted, we would again invoice another 30 per cent. The final 10 per cent was payable once the system was delivered and functioning in our customer’s shop. The relevant point for this discussion is that 90 per cent of the total cost had to be paid before our customer manufactured and delivered even a single part themselves.

Cash Is King

Since I have been providing lease financing for more than 12 years, I can tell you the main reason why my clients choose to finance their purchases, whether they are working with their own bank or preferred alternative lender, is cash flow.

A busy manufacturer’s working capital always is under pressure. They need money for tooling, material, and wages, plus they often experience late payment from their own customers, which hurts cash flow even more.

Then when it comes time to add something as complex as a turnkey system, pulling money from working capital almost is impossible, particularly when the equipment seller needs to be paid in stages.

Any revenue being generated from the new equipment only shows up once the full payment has been received, which can be a long time.

The Finance Option

If the system is financed by a lender that understands the manufacturing industry as opposed to being purchased outright, however, then a lease can be put in place and it will be the lender who pays the equipment seller directly, not the shop owner.

Essentially, the transaction is pre-funded, meaning that the lease commences and it’s the lender that makes the large installments with the shop owner only responsible for the lease’s regular monthly payment. This means the shop owner is out of pocket only for the lease payments that are made while the turnkey system is being built and tested, not the entire purchase price.

A real-world example of this occurred recently when a very good client of mine bought two CNC lathes that were automated with a robot to load/unload parts and a conveyor system. Once we had a lease approval in place, we, as the lender, released the deposit to the equipment builder and started the lease. The total cost of the system was approximately $300,000 and the monthly payments were about $5,900 per month.

We made the payments to the seller while the client had to pay only the monthly lease payment.

The time of the order to the time of delivery and acceptance was about five months, so the customer made five monthly payments totalling $29,500. This was far easier to manage when you consider the deposit alone would have been $90,000.

There is no doubt, regardless of size, all manufacturers struggle with cash flow. That’s why they should explore every avenue to invest in new equipment that doesn’t require them to pull the money from working capital.

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