As a shop owner, you’re likely thinking of adding capacity, given the current upswing in the fabricated metal parts industry. The question is, should you buy new or used equipment?
The advantage of a used machine is it’s assembled and ready to go, so it can be a real life-saver for shops faced with a sudden spike in volumes.
Having grown up in the world of machine tools, courtesy of my grandfather’s business, Gross Machinery Group, I’ve seen first-hand how the right piece of used equipment can boost output, revenue and provide valuable collateral for financing.
Still, it’s buyer beware in this market, so here are a few tips for buying and leasing used equipment, and protecting the value of your new assets once they’re installed.
1). Check the seller’s reputation
It’s always a good idea to get referrals when dealing with a new vendor. Sellers of used equipment usually get paid in full before shipping, so fraud has been an issue. Most of the ones I’ve worked with through the years are reputable, but like in any industry, there are few bad apples to avoid. You might want to ask if the dealer is a member of an association, such as the MDNA (Machinery Dealers National Association). As a machinery appraiser, I’m a member of the MDNA, and find they do a great job governing the behavior of dealers and providing protection to buyers.
2). See the machine in action
Visit the dealer or shop floor to see the equipment under power. If it’s a sizeable investment, take along a skilled technician. There are many private technicians for hire who are really knowledgeable because they formerly worked for machine tool distributors before going out on their own.
3). Minimize your risk
If you can’t see the machine before purchase, look at options such as a return clause, giving you a period of time (such as 30 days) to test it out. If the machine isn’t working as advertised, the dealer may repair it, or provide a refund. Not every dealer will agree to this clause, but you may have the ability to negotiate, especially if the dealer is a member of an association such as the MDNA.
4). Make sure there are no liens or encumbrances
This is an important point we usually check for our clients, as the existence of a lien or competing claim on a machine can delay or scuttle the deal.
5). Don’t overpay
That one sounds obvious, but keep in mind sellers of used machinery often base their price on what they still owe on the equipment—not the real market value. For our clients, we often bring in a third-party appraiser to validate the selling price. Over-paying impacts your working capital and also makes financing more challenging because it increases risk for the lender.
6). Invest in preventative maintenance
Most shops have maintenance people, but they’re generally not trained to look after machine tools. They rarely read the hefty manual that comes with the equipment. In many shops, preventative maintenance is thought of only when the machine breaks down. If you’re a smaller operation, it’s worth sourcing a good technician to perform periodic checks, depending on how many shifts you run. A well-maintained installation will last 10 to 20 years or more—and will have better resale value.
7). Add the equipment to your asset list
Big banks traditionally disregard expensive machinery on your shop floor, but asset-based financers will provide you with loans, sale lease-back and other capital arrangements, based on the value of your machinery. This approach has unlocked capital for countless smaller manufacturers who were turned down for a bank loan.
8). Timing is everything
New machine tools take months to configure, build and install. Buyers who can’t wait that long turn to used equipment—leading to competition and scarce selection when markets are good. It’s wise to be cautious and do your homework, but waiting too long to upgrade or add capacity in a strengthening market can leave you in a situation where the best-value machines have gone to other buyers.
From my years in the machine tool industry, I’ve noticed plenty of innovation and staying-power in Canadian manufacturing, through good times and bad. As we head into improving markets, you’ll likely be assessing your current capacity, volumes and leads from trade shows.
A well-timed machinery investment can open the door to new customers and growth. Along the way, it also provides a ready asset to leverage for the times you might need some additional working capital.
Ken Hurwitz is an account manager with Enable Capital Corp., an asset-based financing company in Toronto. Ken has years of experience in the machine tool industry and now works to help small and mid-sized manufacturers tap into capital to optimize their operations.
Planning to attend CMTS? Swing by the Enable booth for more tips on industrial finance and the used machinery market.
This article is part of our new Financial Management Success Centre, bringing you the latest strategies and trends in equipment finance, capital preservation and leasing opportunities.