Know your financial options, responsibilities

Editor’s Note: Canadian Metalworking invited shop owners from across the country to submit leasing/financing questions to be answered by expert Ken Hurwitz. This is Part I of a two-part series featuring the most common and most interesting questions.

Q: Can I renegotiate in the middle of my lease or loan?
A: When a lease has been granted by an alternative lender/non-bank-owned funder, it’s important for the borrower to understand that the leasing company is under as much pressure from its funding source as they are to make payments.

For the most part, leasing companies secure funds from large institutions, such as a life insurance company that uses a small part of its portfolio to invest in equipment leasing. The life insurance company does this because it earns a better return than from Canada bonds.

With that being said, the funding source also expects to be paid monthly from the leasing company, and this is what stimulates the pressure on the leasing company to collect payment.

Q: I’m getting pressured from collectors. What are my options?
A: In cases in which a manufacturer wants to keep the machine but is getting pressure from collections, there are a few options.

First, I have heard of leasing companies that allow clients to make significantly smaller monthly payments over a short term and then ramp them back up when revenues allow the client to return to the full monthly payment.

Second, there also is the option of applying the remaining payments to a new lease. This stretches out the rest of the payments over a longer term.

For example, let’s say a borrower is 30 months into a 60-month lease for $100,000 with payments of approximately $2,000 per month. If the lease is rewritten and starts with a new 60-month term, the payment lowers to approximately $1,250 per month.

Q: What are my options if I can’t make my payment? Can I break my lease?
A: The reality is we are in a tough time right now because of COVID-19, many manufacturers are unsure of their options.

First, there is no such thing as simply breaking a lease. Even in the example of a car lease, which is where most people have experience with leasing, the client always is responsible for all of the owed payments.

However, if the decision has been made to try to get free from the lease because there is just no use for the equipment right now, the first thing to confirm with the funder is the buyout amount and balance owing.

Once this number is known, the next step is to investigate the marketplace and sell the machine.

One of the reasons machine tools are so popular with lenders is that a high-quality, brand-named machine tool holds its value for a very long time. If the machine still has an active lease, then it is most likely a relatively new machine, and as long as it has been properly maintained and in good working order, it will still be a valuable asset.

Depending on how far the owner is into the lease, they could be very close to, or even in, an equity position that will enable them to sell the machine and hopefully pay off what is owed to the lender.

Q: What is collateral, and why do I need it?
A: Securing funding for machinery can be challenging for one simple reason: These are very expensive assets, and the necessary funds to make a purchase are normally not simply sitting in a bank account.

Because growth shows up on financial statements only after it has happened, it often can be tough to find a lender.

One of the best methods to attract a lender, particularly in cases where the chosen equipment cost does not match the applicant’s credit profile, is to provide additional collateral.

This reduces the risk associated with the transaction and, in turn, allows the lender to process an approval. The simplest form of collateral is the deposit. When getting an approval for 100 per cent of the equipment’s cost is not realistic, offering a deposit has two positive effects. First, it shows that the applicant is serious because they are willing to risk some of their own funds. Second, from the lender’s standpoint, a deposit mitigates some of the risk of the transaction.

A lender that understands machinery and equipment also factors in the quality of the asset and its resale value, which may be needed in the event of a default.

This means that if a sizable deposit has been made upfront, the lender knows that even if the deal goes bad and the equipment is repossessed, once it is resold a significant amount of money is recovered. When this sum is added to the deposit, potential loss is minimized.

A second form of collateral that often is used when cash is not readily available for a deposit is a shop’s existing equipment.

The only problem that can arise here is ensuring that the title of said asset can be conveyed to the lender. This means understanding any General Security Agreement (GSA) that you have.

A GSA is the document that gives a lender a security interest in a specified asset or property that is pledged as collateral. In the event that the borrower defaults, this pledged collateral is seized and sold.

This agreement, presented and signed when an account is opened, gives the bank the first chance at all current and future assets of the company.

The key word here is future because most companies grow and accumulate assets over time. In manufacturing this usually means machinery and other equipment.

In order to use any existing equipment as collateral, the borrower’s bank must provide a waiver -- a simple document that the bank signs to waive its right to the piece of equipment -- so another lender can use it as collateral.

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