Accessing capital for a manufacturing start-up means having a plan
—Sponsored article by Blue Chip Leasing
Originally published in the June 2016 edition of Canadian Metalworking
There’s no doubt when the market is busy, experienced and skilled individuals have a lot of opportunities to grow within the manufacturing industry. But at least for some, the only way to truly grow is to start something on their own.
If you look at successful Canadian manufacturers, you can see they often share common threads. Some started out at the bottom, in many cases having emigrated from another country to work as a low-level operator or apprentice. Some have a strong engineering background, or developed it on the shop floor and honed it to a point where they started running a plant.
Then they all came to the same realization: They could either continue to run someone else’s business, which for many is a secure and successful career, or open their own shop.
This is no easy decision, when you consider having to operate within an industry that is unregulated and fiercely competitive, and when a few cents per part could mean the difference between winning or losing hundreds of thousands or even millions of dollars’ worth of business.
Factor in that you’ll be competing with companies that have strong technical experience and inherent knowledge of how to make complicated parts or equipment from a time, labour, and material perspective. If you don’t understand your product, how it works, and why it costs what it does, it will be a struggle to secure business and make money.
Once the decision has been made, you should consider several factors and create a solid business plan, detailing where the new company will operate, startup costs, how much capital will be required to get the business running, and anticipated sales will be for the first few years.
One of the most important areas to find capital or financing for is manufacturing equipment. The normal inclination for a startup business is to minimize cost wherever possible, but when it comes to securing a lender for equipment, this may not be the best strategy.
The first thing any lender will look at is what is actually being financed. When it comes to machine tools, anyone with industry knowledge knows a good brand-name machine tool has excellent resale value, which in this case is of the utmost importance.
A lender’s first concern is exit strategy. In the event the deal goes badly, they want a comfort level knowing the asset can be resold quickly with relative ease to recover a significant portion of the loan. Finance companies that concentrate in particular industries have in-house specialists that provide evaluations.
In the manufacturing industry, this means they will look at a transaction, and if the equipment is a brand-named quality machine tool, they will know if the deal goes bad and the machine is resold, the true or actual exposure is significantly less than the original selling price.
Because any transaction for a new business requires a deposit from the prospective buyer, the risk is mitigated even further, but it’s knowledge about the equipment that becomes the main difference between doing business with an alternative lender with industry experience and a traditional one such as a chartered bank.
Legal and collection issues
When it comes to getting financing from a traditional bank, the quality of the asset and its perceived resale value factors very little when the applicant is reviewed. This means the credit department will struggle to get this transaction approved.
The lender will also perform a review of the equipment seller to ensure it’s reputable and can provide service and support for the equipment. It does nobody any good if the end user is unable to make product and therefore revenue because spare parts and service are no longer available for the equipment.
The lender also will review the personal credit of the prospective owner and shareholders of the new entity.
These personal reports provide a significant amount of information about the individuals, including how long they have been on file, the number of trades, how much credit they have been extended and, most important, their repayment history.
These reports also provide information for any legal or collection issues. It’s important for any applicant to know what’s on their credit report. If there’s been any negative activity, it’s shared upfront with the potential lender. This way there are no surprises and an explanation is provided at the beginning of the buying process.
Finding financing for a startup business can certainly be a challenge, but it’s important to realize that it may not make sense to start with inexpensive equipment; for a lender that understands and values quality machinery, low-quality equipment may actually make them less interested in the transaction.
Ken Hurwitz is senior account manager with Blue Chip Leasing Corporation, an equipment finance company in Toronto. Ken has years of experience in the machine tool industry and now works to help all types of manufacturers either source or tap into their own capital to optimize their operations. Contact Ken at (416) 614-5878 or at via email. Learn more at www.bluechipleasing.com
This article originally appeared in the June 2016 edition of Canadian Metalworking.
The article is part of the Financial Management Success Centre, showcasing strategies to access working capital, reduce costs, and leverage the value of shop floor equipment.