Get prepared for fall spending now

The cycle of machine tool purchases typically repeats itself on a yearly basis, and by this point in the year, most shop owners have a pretty good idea of what their equipment needs will be for the fall.

The Joint Open House event in Ontario was well-attended in April, and both the Edmonton (WMTS) and Toronto (CMTS) machine tool shows are expecting a strong turnout. I expect that by now many buyers have moved beyond the inquiry stage and may already have a quote in hand for a new piece of equipment.

This means now is the time to start thinking about how the purchase should be financed.

Getting financing

Assuming the required funds are not getting pulled from working capital, here is what a lender looks for when it reviews and approves applications.

The first thing a lender reviews is the asset being financed. When it comes to machine tools, anyone with industry knowledge knows that a good, brand-name machine tool has excellent resale value. Because a lender’s first concern is exit strategy in the event a deal goes south, it wants to know that the asset can be resold quickly and easily so that a significant portion of the loan will be recovered.

In today’s market it is tough to find a piece of equipment that does not have a good resale value. Because the investment in new technology is significant, lenders assume that clients have done their due diligence with respect to the quality of the equipment, as well as service and technical support from the seller.

Now the first question I normally get from potential clients is something along the lines of “How much money can you get for me?” and the answer to that question is found in the financial strength of the company. This determines how much financing can be had.

A lender reviews the company’s operating profit, working capital, and cash flow to determine if the business currently is profitable and has the ability to pay for its existing loans and expenses before seeking new financing.

Another factor looked at is the debt-to-equity ratio, a financial indicator that shows the proportion of equity and debt that the borrower is using to finance its assets. A high debt-to-equity ratio indicates more creditor financing (leases and loans) is being used than investor financing (owner/shareholder funds).

Last to be evaluated are retained earnings, the profits retained by the company that are reinvested in its core business and are not paid out as dividends, as well as the tangible net worth, which is the sum of all the assets (cash, equipment, property) minus any liabilities, to determine the value of the company.

The sum of these two numbers essentially represents the supposed liquidation proceeds a company would fetch if its operations were to cease and the firm was sold off.

Use a registered accountant

While all of this information can be found in a company’s financial statements, I always recommend using a registered accountant from a quality firm. A well-prepared report will provide much more comfort to a potential lender.

An ancillary benefit is talking to an expert who can offer guidance on how to best handle a transaction from an accounting perspective, as well as advice for minimizing tax implications. It is important to keep in mind that internally prepared reports for the current financial year also may be required if the accountant-prepared statement is more than six months old.

Most of my clients use QuickBooks™ or Sage 50 Accounting, which are fairly easy-to-use and intuitive software systems that allow them to keep track of the current fiscal performance. These systems also are used to generate reports for year-end and provide the starting point for an accountant to create the company’s financial statements.

Credit reports

The next area for review are commercial and personal credit reports.

All lenders use a commercial credit reporting system, the most common being Equifax and Dun & Bradstreet (D&B). As well, Paynet, which is a service that deals exclusively with the leasing industry, is used to show how a company has paid its current leases.

Personal credit will be reviewed if the application includes the guarantee of an owner or majority shareholder. These reports provide a significant amount of information on the borrower, including how long their credit history is, the number of transactions, how much credit they have been extended by either their bank or credit card companies, and, most importantly, their repayment history.

These reports also provide information on any legal or collection issues.

It is important for any applicant to know the information that is on their credit report, so if there has been any negative activity, it is shared with the lender to ensure there are no surprises and an explanation is provided with the submission.

Once all of this information has been collected, a write-up is prepared by the lender’s account manager, which details the business, years in operation, experience of owners, and industry served, among other items. It also includes a justification of why the equipment is required and what the potential benefits will be to the bottom line once it has been installed.

This write-up, along with all the financial and commercial information, will be evaluated by a credit analyst to determine if the application is approved, declined, or structured. A structured approval is an approval for less than 100 per cent of the total request. It just means the deal is approved but it requires a deposit and/or additional collateral to lower the transaction size or mitigate risk.

When trying to secure financing for equipment, it is very important to understand the process, but it is also imperative to find a good accountant who can prepare a quality set of financial statements as well as provide some good business advice, both of which are invaluable to any business.

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