Tips for funding machines and automation

Arranging funding for a new piece of equipment can be difficult at the best of times. However, when the machine, which comes at a considerable cost, also requires an automation package to maximize efficiency, it can be overwhelming.

In today’s manufacturing climate, the biggest challenge for many manufacturers is becoming as efficient as possible. There is constant pressure to improve internal processes, find employees with the right mindset and skill set, and, of course, install the latest technology.

New machinery is expensive, and the accessories required to run them efficiently, be it software, measuring systems, or even just additional tooling, make it even tougher for a business owner to invest frequently. And these accessories do not even account for the substantial cost of adding an automation package, which can be anything from a parts conveyor to robots. When I see a manufacturer purchase a stand-alone machine to handle an increase in volume while it struggles to find a competent operator, I am reminded of an interview my grandfather, Harold Gross, chairman of Gross Machinery Group at the time, gave Canadian Metalworking in the October 1976 issue.

The article discussed how manufacturers using manual equipment at that time were investing in expensive new machines with numerical controls (NC) to fight the economic squeeze and battle to stay competitive. His overall point was that installing the newest technology—even during soft markets—keeps manufacturers as efficient as possible, which eventually leads to increased profitability.

“It was always a myth that you needed big production runs to justify NC equipment when really, it is the reverse. Of course, the very big operators—automotive, farm equipment, and aircraft manufactures—were our first customers in this field. That was simply because they understood the advantages and could afford to exploit them, but actually it’s the little guy doing small runs and hoping for repeat business who reaps the real benefits from these machines,” he said.

Now almost 50 years later, the reasoning is just as true.

Finding Funding

Working only with a bank as a funding source can be a challenge, particularly if they have little experience in the manufacturing industry. Banks review the credit profiles of both the business and its owner to determine how much it is prepared to loan. Once the amount is set, there is very little room for any additional funding. This means that if the machine, automation, and accessories total more than the approved amount, the borrower has to make up the difference in cash.

Using an alternative lender, such as an equipment leasing company, as either a complement to your bank or even in lieu of one can be a good idea because it has access to several different funding sources. This means that a purchase can be broken down into pieces.

Instead of needing a single funding source to approve $325,000, it can be broken down into segments: $200,000 for the machine to funder A; $100,000 for an automation package to funder B; and $25,000 for software to funder C.

If your credit profile is good for the $200,000 with funder A, even if a deposit is required, it is likely funders B and C will approve their applications for 100 per cent. There is also a benefit to cash flow because a deposit may only be needed for one funder, if at all. This has been a strategy I have implemented over the years to get clients multiple pieces of equipment, which in some cases has quadrupled their borrowing capacity.

Maintaining Cash Flow

Another reason why manufacturers choose to finance their purchase, whether they are working with their own bank or with their preferred alternative lender, is maintaining cash flow.

A busy shop has several uses for its working capital, such as tooling, material, and wages. Plus, most shops normally have customers who don’t necessarily pay on time.

Then, when it comes time to add machinery, pulling money from their working capital is almost impossible.

This is another way that a leasing company can provide assistance. If the equipment is financed with a lender who understands the industry, then they can put a lease in place to pay the equipment seller directly, saving the shop’s working capital.

Essentially, the transaction is “pre-funded,” meaning the leasing company makes the large installments to the equipment seller and the borrower only has to start the lease and make the regular monthly payments.

A real-world example occurred when a very good client of mine bought two automated CNC lathes, which consisted of a robot to load/unload parts along with a transport conveyor system. Once we had a lease approval in place, we released the deposit to the equipment seller and started the lease. The total cost was approximately $300,000, which required a monthly payment of about $6,000.

The leasing company made the progress payments from design approval through part run-off on the shop floor, while the borrower only had to come up with the regular monthly payments. It took about five months from order to delivery, and my client made five monthly payments totalling $30,000, which was far easier to manage when you consider the deposit alone would have been $90,000.

When it comes to financing equipment, it is important to be aware that in cases in which a single funder is not interested in the complete transaction, all is not lost. There are other ways to get the deal done … and it may even benefit your cash flow.

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