November 21, 2016
In my 37 years in the finance industry, my expertise has been in structuring finance programs best suited to each client’s needs. In this article, I will provide helpful information in structuring the most advantageous financing programs for your operations.
The evaluation of any new machinery purchase centers on the competitive advantages that may be derived though a more efficient production process. Similarly, an evaluation of your financing alternatives should be based on obtaining similar advantages. Cookie-cutter term loan financing may not offer the flexibility and options to allow your organization to grow and prosper.
It seems that the first question asked of any lender is “What is your rate?” Honestly, I have asked the same when obtaining a mortgage or a new car loan, but other factors are just as important. The cost of new machinery continues to rise, and plant/company acquisitions have become a major path to business expansion, making the impact of financing more critical to your tax situation, balance sheet condition, and monthly cash-flow position. Poorly structured financing can limit the ability to expand and grow your company.
I always strongly suggest that the corporate accountant be consulted well in advance of any major asset acquisition and financing project. Your accountant can provide valuable feedback as to tax and balance sheet consequences, which can ensure that you request a financing structure best suited to your needs. Your accountant can also provide most of the information that will be requested.
Once your accountant has provided feedback and information, it is time to contact potential lenders. Lenders set their terms based on their experience in the subject industry, knowledge of the assets being financed, and history, if any, with the borrower. Taking extra time to fully investigate the available financing options and terms offered by both your bank and industry-specific lenders can guarantee you obtain the most advantageous lending terms.
Significant tax savings may be obtained by choosing a lender who will work with your new machine manufacturer and used machinery dealers to structure the third-party sale of existing plant equipment being replaced as a trade-in. This trade-in structure should be addressed and put in place upfront before deposits are paid on the new machinery.
Typically, when ordering a new machine, a 30 percent deposit is due with the order—sometimes many, many months prior to delivery. Some institutions provide excellent bridge loan financing for pre-delivery progress payments, while others do not. This is important, since it allows deposits to be paid without tying up your bank line of credit.
Your future financial flexibility must also be a major factor when choosing a lender. Does the lender require loan covenants that can restrict the ability to borrow in the future? Does the lender require a blanket lien on your assets and personal guarantees? Does the lender provide both lease and loan options?
In closing, it is worthwhile to spend a similar time determining the best machinery financing as you would in choosing the right machine. In this way, you will not only have the most productive and efficient production facility, but the best-scheduled and lowest possible after-tax cost of ownership.
This article was written by Ed Gargiulo.
