Financing turnkeys frees cash flow

Buying machinery and other equipment always is a difficult process financially. This gets even trickier with turnkey setups and the impact financing such a transaction has on a manufacturer’s cash flow.

When I started in this industry in the early ’90s, I was working for my family importing and distributing Japanese machine tools. To successfully sell this high-end equipment, we needed to have a full complement of service technicians, as well as application engineers to support our sales staff. This was the same for any current machinery distributor.

For the most part we sold stand-alone machines, but there were more than a few occasions when customers were looking for additional technology and services beyond simply delivering and installing one machine. That is when we offered a turnkey system.

The term turnkey refers to a system that is ready for immediate use, generally used in the sale or supply of goods or services. It means that when a customer receives the system, it just needs to “turn the key” to make it operational.

For us this meant the end user, usually a large manufacturer, was looking for a complete cell capable of running finished parts that included the design and programming of the parts, automation systems, fixtures, and tooling, along with the machine or machines.

The scope of work required to supply such a service is considerable, and therefore the associated cost is substantial.

Large deposit often required

One key issue for companies selling these turnkey systems is the terms of payment, which is because the first requirement is a large deposit.

Back in the day we took a minimum of 30 per cent with the order to cover our commitments for the equipment, tooling, and accessories required to make the system work, because, in many cases, those suppliers also expected deposits.

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

The next step was to actually put the system together on our floor and organize a full run-off for the customer to demonstrate the system was, in fact, capable of manufacturing finished parts within whatever parameters we had agreed to, for example, cycle time or part tolerances.

Once the run-off was completed and accepted, we invoiced another 30 per cent. The final 10 per cent was then payable once the system was delivered and functioning on the customer’s floor.

The point here, which is relevant for this discussion, is that 90 per cent of the cost had to be paid to us before one part was manufactured.

Reason to finance

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

A manufacturer that is busy has many uses for its working capital, such as for tooling, material, and wages. In addition, it’s normal to have customers who don’t necessarily pay on time.

The revenue that will be generated by the new equipment only starts coming in once parts start shipping, and this can be a long time from when the manufacturing equipment hits the shop floor. However, if the system is financed from a lender that understands the industry, as opposed to purchased outright with cash, a manufacturer can use a loan or lease to pay the equipment seller.

Essentially the transaction is “pre-funded,” meaning the lender will make the large step payments to the equipment seller and the purchaser only has to start the lease and make the regular monthly payments.

Real-world example

A recent example of this situation occurred when a good customer of mine bought two CNC lathes with an automation system that consisted of a robot to load/unload parts along with a conveyor system.

Once we had an approval in place, we released the deposit and started the lease. The total cost of the system was approximately $300,000 and the monthly payments were about $5,000. As the lender we made the progress payments to the equipment seller, and my client only had to come up with the regular monthly payments.

The time from order to delivery was about five months, so the customer made five monthly payments totalling $25,000. A full deposit in a purchase would have been $90,000.

The reality is that more than a few factors had to be addressed to get this done.

First, we needed to ensure the credit was available. Second, the purchaser had to be confident that the seller could deliver the system to their satisfaction. Last, a lender was required who understands the industry and was prepared to “pre-fund” the transaction.

There is no doubt that all manufacturers, regardless of size, struggle with cash flow; therefore, every avenue to invest in new equipment without having to pull the money from working capital must be explored.

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