It's all about the lease structure

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. Getty

Structuring a new lease transaction properly, or restructuring an existing one, can help alleviate some of the financial pressure that comes with getting the latest technology on your shop floor.

In today’s world the challenge for every manufacturer is to remain as efficient as possible. The pressure is constant to improve internal processes, find employees with the right mindset and skills, and install the latest technology.

New machines are 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 in a new machine.

When I see a manufacturer purchase a 3-axis VMC to handle an increase in volume for a particular job when a 5-axis machine 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 Metalworking in October 1976. The article discussed how manufacturers using manual equipment were starting to invest in expensive, new NC machines in their battle to stay competitive. His overall point was that installing the newest technology, even during soft markets, keeps industry moving forward and 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 is the reverse. 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,” he told the magazine.

The article discussed the advantages of NC equipment, such as substantial reduction in setup time; fewer required special jigs and fixtures; and, most important, the need for fewer people to run the equipment, which was a huge advantage because of a shortage of skilled workers.

Now here we are 45 years later, and the reasoning is just as true today.

My grandfather literally spent his entire life selling machinery, from a teenager right up until he passed at the age of 89. Many considered him “old school,” but I always saw him as an incredibly forward-thinking individual, which is one trait of his (among many) that I have always tried to replicate.

Getting new technology on the shop floor is important. Here are three ways that correctly structuring an equipment lease can help:

1. Use a deposit, if necessary.

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 might 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 monthly, as opposed to the deposit, which must be paid in full and upfront.

2. Skip payments, when needed.

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

3. Trade up, when available.

Let’s say a manufacturer has an existing five-year lease for a piece of equipment, but three years into the agreement the needs of the shop have changed, and other machines now can process the existing work more efficiently.

An option, in this case, is for the manufacturer to trade in the existing machine and get a new one.

New equipment dealers are always looking for good, used machines or they work closely with used equipment dealers that are looking for inventory.

After three years, our $300,000 machine with a monthly payment of $6,000 now is valued at 50 per cent of its original value, or $150,000. Because the new machine will cost $350,000, the equipment dealer will require an additional $200,000.

The 24 remaining payments of $6,000 also are still owing on the lease, for a total of $144,000, and this is added to the net amount required to finance the new machine. The leasing company can arrange a new five-year lease for the total of $344,000.

The impact on the payment is minimal, in relative terms, because it will now be $6,700 per month. However, the manufacturer now has a new machine on the floor that is completely suited to its current work.

A lot has changed since 1976. Technology is vastly different, and the market is far more competitive.

But sometimes it’s still a good idea to take a moment and reflect on where we came from, while at the same time using all the tools available today to ensure every opportunity to grow and make money is utilized.

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