Manufacturing equipment can be a valuable source of working capital for business growth.
Manufacturers in growth mode are all too familiar with the challenge of raising working capital. Whether it’s to expand, launch a new product or buy raw materials, access to cash can make or break even the best ideas.
As a certified appraiser whose family owned a machine tool distribution business for decades, I’ve seen numerous examples of the innovation that’s possible with robust financial strategies.
So what is the right way to find and manage working capital? Here are a few key considerations.
1). Use bank credit for short-term expenses. If you have an operating line with a bank, avoid using it to buy equipment. Today’s interest rates are low, so manufacturers might be tempted to use credit lines for major expenditures. Doing so can leave you short on capital to pay employees, suppliers and other invoices. A big customer failing to pay on time can leave you tapped out financially, and that’s when you’ll need the safety net of your operating line.
2). Finance long-term investments. You may pay a slightly higher interest rate on asset-based financing, but considering the length of time the machine will be in service and the amount of revenue it will generate, the expense makes financial sense, especially when compared to the risks of using up your working capital.
3). Assess the value of your equipment. Shop floor machinery can be used to tap into financing such as a sale lease-back. Under this arrangement, you sell a piece of machinery to a lender for a nominal amount. The lender takes ownership of the machine, provides you with an amount of money based on the machine’s value, which you pay back over time.
4). Get an expert opinion. If your machinery is old and antiquated, banks might not approve financing against it, but don’t be deterred. Get input from a reliable auction company (we use Glen Shoniker of Asset Services), appraiser or asset-based lender who has deep knowledge of machine tools and their resale value. Recently, we had a client (a small manufacturer aiming to expand into the US) who was refused a loan by his bank. When we saw his shop floor assets, the decision for us to provide him with financing was easy.
5). Make sure you own the assets free and clear. It sounds simple enough—you buy a machine tool and pay for it. But if you have a relationship with a bank, there’s a good chance they have a General Security Agreement (GSA) covering all your assets. A GSA provides creditors with a security interest in your inventory, accounts receivable, equipment and other assets. Every piece of equipment you’ve added through the years could have been automatically included in the GSA.
6). If in doubt—do a search. One of the first services we provide to clients is a search of lien registrations on their equipment. Often, my clients are surprised to learn they can’t sell or leverage their machinery as it is encumbered by their bank under a GSA.
7). Ask your bank to waive their interest. The key question here is, how good is your relationship with your bank? Your account manager might be convinced to waive their rights on certain pieces of equipment. As long as your company isn’t in distress, banks sometimes exempt certain pieces, or at least enough for you to arrange a sale lease-back with another lender. This is something we help clients with all the time, in terms of the forms and procedure.
8). Understand loan-to-value. Even if a machine tool on your shop floor is worth $100,000, you may not get the full amount in financing. There’s a difference between fair market value, and the price the machine would get under forced sale or at auction if it were to be seized. In this case, there are dealer, auction and other costs for the lender—which have to be accounted for in the loan amount. That said, the healthier your business, the better the loan-to-value ratio.
9). Know your tolerance for paperwork. Banks will want a lot of information from you before providing any significant amount of financing or credit. If gathering all the data and reports seems onerous, asset-based financing might be a better option. In this case, the machinery speaks for itself. Asset-based lenders conduct due diligence as well, but if they’re confident in the asset’s value, and the business makes sense, that’s usually enough for them to unlock financing.
One of manufacturing’s biggest pain points is access to capital. With the right financing, your company is in a far better position to take on larger orders, expand, upgrade technology and innovate.
Of the numerous financing options, the key is finding the one that makes the most sense for your business today, and over the long term.
—Ken Hurwitz is the Senior Account Manager with Enable Capital Corp., an asset-based lending company in Toronto. Ken has years of experience in the machine tool industry and now works to help all types of manufacturers tap into their own capital to optimize their operations. Contact Ken at (416) 614-5878 or via email. Learn more at www.enablecapitalcorp.com
This article is part of the Financial Management Success Centre, bringing you the latest strategies and trends in equipment finance, capital preservation and leasing opportunities.