Use your money wisely: Part 1

—Sponsored article by Blue Chip Leasing

Canadian Metalworking invited shop owners from across the country to submit leasing/financing questions to be answered by expert Ken Hurwitz. This is Part 1 of a two-part series featuring the most common and most interesting questions.

Q: Why would I want to lease a machine?
A: The textbook answer is that you should pay cash for assets that appreciate and lease/finance assets that depreciate. However, real life rarely works like textbook answers.

Q: How should a lease payment compare to generated revenue?
A: When leasing you have the ability to match monthly lease expenses directly to revenue. Instead of dealing with a large initial cash outlay for a more expensive machinery purchase, the lease payment typically is (or ought to be) a small percentage of the monthly revenue generated by the equipment.

For example, the lease payment on a $100,000 vertical machining centre works out to approximately $1,900 per month over five years. But this piece of equipment should generate a minimum of $12,000 to $14,000 per month in revenue.

Q: What effect will a lease have on my cash flow?
A: Working capital is king, and nearly all businesses struggle with cash flow.

Problems can arise collecting receivables, additional material may be needed for a large order, tooling may be needed, or you may need to hire another operator. All of these require cash flow. With a lease, there’s no need to tie up valuable cash in an expenditure that can be financed. Cash is better used in areas that can’t be financed, such as hiring of additional staff, product development, or as a deposit to buy your current unit or manufacturing facility.

People assume financing is for the guy who can’t write a cheque, but my biggest clients are successful manufacturers who can write a cheque but choose to spend their money elsewhere.

Q: How would a lease affect my ability to secure a loan?
A: The typical leasing company isn’t looking to be your bank. In a perfect world, leasing companies complement the financing you already have in place. Most astute manufacturers use their bank for an operating line to cover short-term needs and use lease financing for long-term debt.

As a business owner, you should never use short-term financing like an operating line to pay for a long-term asset such as manufacturing equipment.

Q: How long does it take to get a lease?
A: Most of the inquiries I get are from manufacturers that have either just secured a contract and won some new business or got more work from an existing customer. In both cases, time is of the essence, and getting machinery or capital in place quickly is paramount.

A well-organized leasing company has the ability to react within hours and at worst in a matter of a few days. This type of response isn’t what most people experience with their bank or preferred lending institution.

However, simplicity and convenience extend far beyond quick responses. Once a deal is signed and assuming the account remains in good standing (payments are made on time each month), you should never hear from your lessor except during the holiday season when it sends out gift baskets.

Doing business with a bank will mean monthly reporting from either your accounting department or bookkeeper as well as yearly reviews. These additional costs, which can be significant, are not reflected in the rate the banks charge.

The rest of this column can be found on Canadian Metalworking, a market news site for the metal fabrication industry.

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.