It’s show season, and many company owners are thinking about purchasing new machinery. Most likely are focused on specifications and performance of the machines, but it’s important not to overlook the financing arrangements. That can make all the difference between a successful purchase and a not-so-good deal.
 
Here are a few tips to consider:
 

1. Be prepared.

Finance manager Stan Ragley oversees financing of Biesse and Intermac machines for America and Canada. He preaches the “Five C’s” to make sure customers are prepared:
• Capacity:  Do you have sufficient cash flow to service the loan?
• Character: What is your credit history, both personal and business?
• Collateral: What collateral do you have? This could be inventory, A/R, free and clear equipment or property that you may need to secure the loan.
• Capital: What is the net worth of your business and personal net worth?
• Conditions: What is the purpose of the loan and what factors should be considered? 
 

2. Lease or buy.

In recent years, the decision to lease or buy equipment has become less clear. Many deals today are structured as lease to purchase. Still, you should approach the decision with the same questions in mind, such as how long you expect to keep the equipment, how much revenue you expect the equipment to generate, and how much opportunity for new business or production improvements you expect the machinery to produce.
 

3. Pre-approval.

It doesn’t cost anything to get pre-approved. There are no fees to submit an application or do the credit check required during the pre-approval process. Additionally, there is no obligation to use the approval once it’s secured. While an approval generally expires after 90 days, experts say it is often easy to get it quickly re-approved after that time period has elapsed.
 

4. Where to obtain financing.

Most machinery distributors have financing connections through either in-house staff or close partnerships with finance institutions. You might also already have an ongoing bank relationship that will work with you. However, sometimes equipment companies have access to a wider variety of financial options and different lenders that offer competitive terms compared to typical commercial lending products.
 
Several finance experts we’ve spoken with over the years suggest it is crucial to have a financial partner that understands your business and the woodworking industry. According to the Equipment Leasing and Finance Association, equipment financing in the industrial/manufacturing sector accounts for only 3.7 percent of all business equipment financing, so it’s not surprising that not all lenders have a clear understanding of the market.
 
Most lenders won’t provide funds on a projection of growth even though that  might be one of the key reasons you want to invest in new equipment.
 

5. Don’t forget details.

Little oversights could cause big problems when the time comes to move on a machine. Ragley says he encounters many customers who, due to the size of their company, don’t have CFOs or accountants monitoring deadlines for simple things like paying an annual LLC fee to ensure the company remains active. He advises those customers to do their due diligence for credit related issues once each calendar year.
 
“For small business financing, which is basically $5,000-500,000, it’s the same for everybody,” he said. “We have to look at certain things regarding their credit and if they’re not in order, we have to ask questions. The biggest thing any small business can do is have both their business and personal credit in order. Particularly for a show, you don’t want to be waiting until the last minute because it can be a very stressful situation.”
 

6. Understand all the costs.

Remember that with today’s technology, often an equipment purchase is more complex. Do you need plant changes to accommodate the new equipment? Do you need ancillary equipment, such as software, dust collection, vacuum pumps, or material handling equipment? All of those things and their costs should be considered as part of the purchase. 
 

7. Figuring ROI.

When you calculate your return on investment for woodworking machinery, some experts suggest comparing it to what an hourly employee would cost in your business. This isn’t to say the machine will replace X-number of employees (although that might be your intent). It’s more about comparing monthly, weekly, daily, and hourly costs to labor costs. 
 
Another key factor to consider are tax implications. Check with your accountant and equipment distributors about how you can structure a deal to take maximum advantage of tax incentives potentially available from federal, state, or even local authorities.
 

8. Clarify all terms.

You’re likely to run into trouble if you don’t clarify all terms in advance and get them in writing. This includes insurance, taxes, maintenance, who handles what and how much it will cost. 
 
What’s the procedure for upgrades? If it’s a lease-purchase, what happens at the end of the lease term? What happens if you want to return or trade-in the equipment? Are there any additional costs or payments triggered by the conclusion of the agreement?
 

9. Get help.

In addition to advice from vendors, you should consider obtaining as much independent information as possible. One source is the Equipment Leasing and Finance Association (www.equipmentfinanceadvantage.org). If you already have a relationship with a business consultant, have them weigh in your proposed purchase. Free mentoring and consulting advice is often available from SCORE (www.score.org), which typically involves retired successful executives sharing their business expertise.
 
Don’t overlook colleagues who might have already gone down a similar path. If you are a member of a trade association such as the CMA, KCMA, AWI, etc., check with fellow members about suggestions related to your proposed equipment purchase and financing. 
 
Karl D. Forth also contributed to this report.

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