—This article was originally published in the March 2016 of Canadian Metalworking
Over the years, I’ve written extensively about why financing equipment makes sense for Canadian manufacturers.
When companies have money in the bank and can write a cheque to purchase equipment, that money could still be better used for things that can’t be financed, such as tooling, material and wages. For companies that don’t have cash sitting in the bank, but have opportunities for work, financing the equipment may make sense because the monthly cost is just a small percentage of the revenue the equipment will generate.
In late 2015 Canadian Metalworking hosted an Energy Management Roundtable in which I participated. Essentially, this group was assembled to talk about the benefits of improving energy performance. Specifically, many new technologies, retrofits and upgrades are available, as well as incentive programs to improve efficiency, which will in turn reduce costs and have a positive effect on the bottom line.
To be honest, my background is in both sales of machine tools and equipment lease financing, so I wasn’t really sure what I could add to a discussion that included representatives from some of Canada’s largest manufacturers, the Independent Electricity System Operator (IESO) and Toronto Hydro.
However, what I soon learned was that before any energy-saving strategies are implemented, there can be significant upfront cost.
These costs can arise from the energy audit, which identifies how energy is being used in a facility, and for implementing new systems and upgrading the equipment that will ultimately provide the energy savings.
Although there are incentives for completing energy audits and assessing the potential for energy savings through equipment replacement, the hard costs of buying new lighting systems, air compressors, and higher efficiency motors may require business owners to spend more money.
Installing energy efficient is no different than facing the cost of buying new equipment. It comes with a considerable cost and pulling it from working capital can be quite challenging.
This is a situation in which financing can assist with the upfront costs. A standard equipment lease’s term typically is between two and five years but in the case of energy savings, the benefits are perpetual.
What was most interesting about the roundtable discussion was the amount of money a large manufacturing facility can actually save on a yearly basis in terms of electricity and compressed air consumption.
As an example, Ontario manufacturers spend up to 20 percent of their electricity bills on compressed air. Inefficient systems typically use 20 to 50 percent more electricity than necessary.
For example, a 10-horsepower compressor, running one shift, costs approximately $1,720 per year; while a 100-horsepower compressor can cost $17,120 per year.
One manufacturer talked about spending more than $200,000 to upgrade its facility, but the payback period was less than two years, based on energy savings alone.
It can be a challenge, however, to find that kind of money in working capital. This is where financing can provide a solution.
Although funders prefer to finance machine tools and other types of manufacturing equipment which have good resale values and therefore mitigate the risk of the transaction, when credit is strong and the business case is justifiable, getting funding in place can be rather routine.
About a month after the roundtable discussion I was able to put this theory into practice. I was approached by a customer—the owner of a small gym and for whom I had arranged a lease for some fitness equipment. The customer asked if we could finance a lighting retrofit costing $12,000.
The client had performed a study with his local electricity provider that confirmed he would save almost $8,000 per year once the new equipment was in place. Needless to say, we got an approval and structured the lease over three years.
There’s no question manufacturing in Canada is one of the toughest and most competitive industries, and the pressure is constant to reduce cost per part in order to win more business. This means every single area of the facility should be reviewed to see where potential cost savings are, and all of the sources available to finance improvements should be investigated.
No opportunity to save money should be lost due to a lack of funding.
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, and was first published in the March 2016 edition of Canadian Metalworking.