Key factors include financial statements, equipment quality and its potential benefits
—Sponsored article by Blue Chip Leasing
The cycle of machine tool purchasing basically repeats itself on a yearly basis. Usually around the spring, shop owners get a good idea of what their equipment needs will be for the rest of the year. It’s a time when inquires turn into quotes, and the next step is finalizing pricing, terms and then issuing purchase orders.
Companies looking for financing for their new equipment likely wonder how they’re application will be viewed. Below are a few points related to what a finance company looks at when reviewing and approving applications for the financing of machinery and equipment.
Asset quality and seller—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 will have an excellent re-sale value. Remember, a lender’s first concern is exit strategy. In the event a deal goes badly, they want a comfort level knowing the asset can be re-sold with relative ease and with a significant portion of the loan recovered. There will also be a review of the vendor (seller) to ensure it is reputable and can provide required service and support.
Amount required—A question I get all the time is, “Ken, how big a transaction can you handle?” The reality for most lenders is the transaction size is limited only by the size of the company making the inquiry. The amount of funds a typical finance company has available is for the most part limitless—it’s the equity box of the company (or the company plus the credit strength of its owners) that determines how much financing will be available.
Essentially, there will be a review of the company’s working capital and cash flow, meaning the ability for it to pay for its current loans and/or expenses before adding anything new. Another factor is debt to equity ratio, which indicates what proportion of equity and debt the company is using to finance its assets. A higher debt to equity ratio indicates more financing (bank loans) is used than investor financing (owner/shareholder).
Lastly, retained earnings (the profits retained by the company which are reinvested in its core business and are not paid out as dividends) as well as tangible net worth (the sum of all the tangible assets—cash, equipment, property, etc.—less any liabilities) will be looked into.
Financial statements—Depending on the size of the request, the financial statements of the applicant will detail all the above information. I always recommend using a registered accountant (member of CPA) from a quality accounting firm as opposed to less expensive tax services. The difference in the quality of the report is significant, and a well prepared report will provide much more comfort to the potential lender. There are three types of financial statements, Notice to Reader, Review Engagement, and Audited. The larger the request the more detailed the financial statements will need to be. Internally prepared statements, called interims, for the current fiscal year may also be required. Most of my clients use QuickBooks or Simply Accounting to generate interim statements, these are fairly easy to use and intuitive applications which keep track of the current year’s performance.
Commercial and personal reports—All lenders will also use some sort of commercial reporting, the most common being Equifax or Dun & Bradstreet (D&B) as well as Paynet. Personal reports will also be reviewed when the application includes a guarantee of the owner(s) or majority shareholder(s). These reports provide information on the individual including how much credit they have been extended by either credit card companies or their bank, and most importantly their repayment history as well as any legal or collection issues. It is important for any applicant to know the information on their credit report so there are no surprises and an explanation is provided with the original submission.
Once all of this information has been collected a write-up will be prepared including a justification for why the equipment is required and the potential benefits to the company’s bottom line. This report, along with the financial and commercial information, will be evaluated 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 requires a deposit and/or additional collateral (existing equipment owned free and clear) to lower the transaction size and mitigate the risk.
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 is part of the Financial Management Success Centre, showcasing strategies to access working capital, reduce costs, and leverage the value of shop floor equipment.