Get a lease that’s structured for you

Properly structuring a lease transaction alleviates some of the financial pressure that comes with putting the latest machine technology on the floor. Regardless of where funds are coming from, be it working capital or a lender, the timing required to install a new machine tool and start making money with it can cause a serious headache.

The challenge for every manufacturer today is to be as efficient as possible. Competition isn’t just coming from the shop around the corner; these days it’s the shop on the other side of the world. Constant pressure exists to improve internal processes, find employees with the right mindset and skill set, and install the latest technology.

New machinery is expensive, and the accessories required to run it efficiently, whether it is software, measuring systems, or tooling, make it even tougher for a business owner to stay completely up-to-date.

Old advice still valid

When I see companies purchase, say, a new 2-axis lathe when a multiaxis turning centre with live tools and a subspindle is what’s really needed, or install a 3-axis vertical machining centre to handle an increase in volume when a machine with 5-axis capability is what should be purchased to handle current and future work, it reminds me of an interview my grandfather, Harold Gross, chairman of Gross Machinery Group, gave Canadian Machinery and Metalworking (the former name of this publication) in October 1976.

The article discussed how manufacturers were investing in expensive machines with numeric controls (NC) to fight the economic squeeze in their battle to stay competitive. His overall point was that installing the newest technology, even during soft market times, keeps manufacturers efficient, which in turn leads to profitability.

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

The article went on to discuss the advantages of NC equipment, such as substantial reduction in setup time, and fewer required special jigs or fixtures. But most importantly, these NC machines required fewer people, which was a huge advantage because of a shortage of skilled workers.

Here we are, almost 43 years later, and those reasons are just as relevant today as they were when that interview was published. Amazing when you think about it.

Because my grandfather spent an entire lifetime selling machine tools, many people considered him to be “old school,” but I always saw him as incredibly forward-thinking. He knew the value of having new equipment on the shop floor.

A correctly structured lease assists manufacturers in getting the latest technology in their facilities.

Handling the deposit

A new machine with the proper options and accessories normally is a factory order. It is not uncommon for delivery to take three to four months, and in a busy market, it may take even longer.

A shop that places an order will almost always be required to provide a large deposit. Think 20 to 30 per cent. For a $300,000 machine, that is significant money.

In this situation, dealing with a leasing company with industry experience can be an asset, as long as the buyer has been approved for 100 per cent of the financing. In this case, a lease can be arranged in which the lender supplies the deposit and starts the lease.

If the transaction is financed over five years, the payment would be in the neighbourhood of $6,000 per month, so even after four months, the amount of funds paid out is still far below what the deposit requirement would have been. Plus, the payment is paid monthly as opposed to the deposit, which must be paid in full and upfront.

Large purchase option

A large purchase lease structure can assist manufacturers by lowering the monthly payment by adding a larger end-of-lease purchase payment.

The biggest struggle any manufacturer has is managing cash flow. Minimizing a monthly lease payment will greatly assist cash flow, and this can be done by putting a purchase option of between 10 and 20 per cent at the end of the lease.

Using the same $300,000 example, structuring the lease with a 20 per cent purchase option will bring the payment down to approximately $5,000 per month, but it also means $60,000 will be due at the end of the five-year term.

However, at that point the manufacturer will have a few options beyond paying the amount in full. It could either continue to make additional monthly payments until the machine is paid off, or it could arrange a new lease for $60,000 and significantly reduce the monthly payment. Either way, the structure has had a positive impact on cash flow.

Skipping payments

This is a tool that gives manufacturers additional time to get a new machine delivered, installed, and debugged before any lease payments start. This means the equipment is already generating revenue before any payment is due.

A leasing company that understands the manufacturing industry can arrange a skip payment, so that for the first three months (or more) either nothing will be required at all or a very minimal amount, like a few hundred dollars per month.

This provides the manufacturer with valuable time to get the machine running optimally, while it isn’t generating revenue, without the pressure of making payments.