Common-sense financing

—Sponsored article by Blue Chip Leasing

Brian Dunn, owner of IRC Tool & Mold, Windsor, Ont., has grown his business phenomenally in a relatively short amount of time. Dunn’s success is attributed to hard work, but also to the assistance of banks, and support from an equipment leasing company and more than one machine tool manufacturer.

Dunn studied mouldmaking at school and started in that industry once he graduated. Over the next 15 years his working experience included mould design, production, sales, and management for other companies and then the establishment of IRC as a mould engineering/consulting provider.

After about five years as a consultant, Dunn began manufacturing, which was the next logical step and the only way for him to continue to grow his company. I first connected with Dunn in 2012 when he was sourcing financing for his first machine, a 40- by 20-in. vertical machining centre. The price of the machine equated to 80 per cent of his sales, so needless to say, it was not easy to get an approval.

The toughest part of my job is seeing a forward-thinking individual who clearly knows the business and wants to invest in good equipment, but whose business on paper doesn’t line up with the needed financing.

Dunn told me the equipment manufacturer was prepared to put a machine on his floor with very favourable terms and with a significantly smaller deposit than I could offer, so we both decided the OEM’s financing was the right way to proceed. In many cases, particularly for young companies and startups, large financing transactions are difficult from a leasing company. In these situations, using vendor financing makes sense.

OEMs always are motivated to sell equipment, and in the event of a default, they have the ability to remove, store, repair, and remarket the equipment. The reality is (and I can speak to this firsthand from my experience as a seller of Japanese machine tools), when a machine is repossessed, the dealer can make more profit than when it was sold originally because there is always an active market for good used equipment.

Dunn and I both knew the machine was never going to get repossessed, but he appreciated that I pushed him in a direction that was best for him. Even though I didn’t book the deal, I probably landed what ended up being one of my best customers.

The first 12 jobs Dunn ran on his new VMC were small, general machining parts, and finally the 13th was his first mould. For the most part, the work was coming from his existing client base from his consulting business. It wasn’t long—less than one year—before he needed a second machining centre, and then eventually a third.

After just two years of manufacturing, Dunn’s revenues were more than four times what they were as a consultant and the company was profitable at the operating level. His second and third machines were also financed by the manufacturer, again under very favourable terms. Dunn’s next issue became floor space.

There is no doubt that real estate is one of the best assets to own, and paying a mortgage as opposed to paying rent makes sense for many obvious reasons. Because IRC now required more floor space, and with sales more than doubling on a yearly basis, real estate was an excellent place to invest. Dunn purchased a building, which immediately provided him with manufacturing space for more equipment, but he also gained extra land that could allow him to expand even further.

At this point Dunn had sufficient machine capacity to handle his milling requirements, but he was still subcontracting one area of his business: EDM. It was this work that provided an opportunity for us to do some business together for the first time. By establishing and EDM department, Dunn kept work in-house, had better control over both quality and delivery times, and enjoyed an ROI of less than two years.

The last piece of equipment added to the shop was a large 5-axis machine. The justification for this purchase was simple: The savings in setup time and improved efficiency combined with not having to outsource the work. Needless to say, finding funding sources for what was now a well-established, successful business was about as easy as it gets in my world.

One of the issues many manufacturers struggle with is when to add equipment. In many cases, they wait until they have the work before they commit to adding equipment. Although this makes senses on many levels, invariably what happens is that the best machine for the job isn’t immediately available, particularly if the manufacturer is considering high-end equipment, so a machine is selected based only on availability.

“Having good equipment on the floor is very important, particularly when your customers are OEMs or Tier 1 suppliers,” said Dunn. “They want to know their parts are being made on machines they themselves have installed, but they also want to know you already have the capacity to handle the work.”

Clearly, a lot of factors have contributed to IRC’s success, but if there is one takeaway from Dunn’s story, it is the realization that there are many options for getting good equipment on your floor, particularly when yours is a young but growing business. It also usually takes more than a typical banking relationship to get the best financing, and, when you are investing your own money, it’s important that you get the best return.

This column originally appeared in the November 2017 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.