Finding the right lender

Most commercial bank accounts are established at the institution where the owner personally does their banking, but that is not always the best place for their commercial business.

Canadian manufacturers are in a very specialized and competitive business and, therefore, their lender should have a good understanding of the manufacturing industry to provide proper service. Here are four areas to consider when choosing a lender:

1. Manufacturing Industry Expertise

This is the most important factor when choosing a lender because it allows you to find an industry-specific lender that will actually approve your transaction.

When a bank reviews an application, it always evaluates its exist strategy. As an example, a traditional bank will not lend more than 70 to 75 per cent of the purchase price of a home, but when they do, it is at cheap rates (although with the recent increases to the prime lending rate, it is all relative).

First, a mortgage is a very long-term transaction, often 20 years or more. Because the interest is compounded, even at very low rates, substantial interest is paid as profit to the bank. Also, and more importantly, the bank is in an equity position from Day 1, so in the event of default, once the property is sold, the bank gets all its money back.

A leasing company focuses on certain assets in which it has expertise and staff familiar with both the industry and equipment. This means that a $200,000 transaction for a quality machine tool isn’t a risk of $200,000 (which is how it is perceived by a typical bank).

This is because if the deal goes bad in the first year (when the fewest have been payments made) and the equipment is repossessed, a minimum 50 to 60 per cent of the original value will be recovered when the equipment is re-sold. A leasing company looks at the risk in the transaction being only the difference between the selling price when new and the recovered amount when resold.

2. Speed Versus Lowest Cost of Funds

Regardless of the industry, it is normal to pay a premium for faster service. When it comes to the lending world, this analogy fits just as well. It often can be a very lengthy process to get an approval in place even from your existing lender.

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

When it comes to lowest cost of funds, no doubt a bank will always be cheapest, even with the current increasing rate environment, when compared to the typical leasing company.

This is because a leasing company is not a deposit-taking institution and secures its funding from large organizations like life insurance companies. Leasing companies essentially “buy” the money, so even though it is more expensive, the additional cost can be as small as a few hundred basis points.

However, and most importantly, a leasing company is very responsive and can approve applications within a few business days based upon financial information put together for tax season and filed with your accountant.

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 it wanted to charge an application review fee. Even in cases where your banking relationship has been great, it still is important to have options. I tell all my clients just like banks have more than one customer, they also should have more than one lender.

3. Vendor Payment

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

A leasing company can handle the step payments, but when you go to your bank, you likely will be 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 time of order placement and when the machine is installed on the shop floor.

4. Structure

The ability to modify payment structure is a tool only found within the equipment leasing industry.

When a new piece of equipment is purchased, it usually takes time to install, set up, program, and debug before it generates parts. What a leasing company can potentially offer is a program where the payments are deferred for a few months, and they won’t commence until the machine is up and running and, most importantly, generating revenue.

This flexibility also is needed when a borrower has only been approved for, say, 80 per cent of the total transaction cost, requiring a substantial deposit. A competent leasing company can structure the transaction so the deposit is paid over the first six to 12 months of the lease as opposed to upfront.

These are tools that assist in giving you time to not only get a new machine delivered, but also installed and debugged. Then when the payments commence, the equipment already is generating revenue.

I realize I’ve covered a lot of territory here, but if there is one takeaway, it’s that although there are lots of options in the marketplace, it is quite possible there are only a few potential fits for your business.

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