How to Finance Heavy Equipment

How To Finance Heavy Equipment For US Manufacturing Operations

June 26, 2015
In today's market, nearly every aspect of acquiring new equipment is financeable, from the equipment itself, to installation costs, to freight. Here's how to do it right.

Onshoring has become a major trend in the United States. U.S.-based companies are increasingly pulling their overseas manufacturing efforts and setting up shop in the States. In fact, since 2010, more than 200 companies, most of which are U.S.-based, have brought back production that had been sent out of the country. In addition, foreign companies are increasingly bringing their manufacturing jobs to the United States. According to the Organization for International Investment (OFII), foreign investment in U.S. manufacturing totaled $493 billion from 2007 through 2012, as opposed to a total of $270 billion the previous six years.

Based on this revival of the U.S. manufacturing industry, more companies are now creating their products in the U.S., some even for the first time. As these companies work to set up U.S. operations while staying competitive in the marketplace, the need for creative financing solutions for a wide variety of manufacturing equipment has emerged as a priority.

"... manufacturing companies ... are benefiting from an increasingly competitive lending environment." — Eric Freeman, Vice President, Summit Funding Group

Today’s manufacturing companies have many options when it comes to financing equipment. In addition to the availability of financing, these firms are benefiting from an increasingly competitive lending environment. For example, manufacturing companies with good credit can secure 100% financing with terms up to 7 years. In addition, interest rates have never been lower, and many finance companies are offering rates in the 3% range with nothing more than the equipment as collateral.

If manufacturing companies work with an experienced financier, the number of finance options available are simply expansive. Manufacturing companies can secure both operating and capital leases, and can work with their equipment finance expert to create a financing solution that perfectly suits the needs of their business.

For example, in today’s market, nearly every aspect of acquiring new equipment is financeable, from the equipment itself, to installation costs, to freight. Many finance companies will even cover soft costs, and will work with vendors to pay off vendor costs up front, ensuring that each piece of equipment is delivered and installed on time.
      The bottom line is this:  manufacturing companies have a tremendous amount of flexibility with regard to their finance structures and what they can finance in the current market.

Finance Options: Capital Leases vs. Lease-To-Own

While the current financing climate might appear to be “too good to be true,” there is a caveat that manufacturing companies should note.  Even with these extremely lucrative financing options available, companies must still navigate the complicated finance waters and their many potential courses. Working with a finance expert who not only knows equipment finance, but also knows manufacturing is vital to obtaining the best terms.  This applies not only to rate and finance terms, but also to finance structures and how those structures can impact a manufacturing company’s business.
    For example, most manufacturing companies are familiar and comfortable with the idea of  a capital lease. Capital leases allow owners to keep equipment and equipment debt off their official books, while simultaneously allowing these companies to own the equipment once the lease is complete. This option is attractive to companies who need to keep additional debt off their balance sheets, but still want to own their equipment. For this reason, capital leases make perfect sense for industries in which manufacturing processes do not change rapidly.  The key is that the equipment must still be relevant and useable in 10, 15 and even 20 years.
      While capital leases have become the industry standard, these structures don’t offer a great deal of flexibility with regard to changing technology. For example, if a company takes out a capital lease on a piece of equipment, then technology evolves and better equipment is available by the end of the lease, the capital lease has already locked that company into purchasing that piece of equipment.  In this scenario, the company is simply stuck with the outdated equipment.
      At the rate technology changes today, many manufacturing companies will see equipment continue to evolve and increase in efficiency.  As a result, capital leases will increasingly leave owners less competitive in their marketplace due to their obsolete equipment.
      For this reason, we often help our clients to instead set up financing in a lease-to-own structure. This structure is very similar to a traditional capital lease, but it permits companies to defer their purchase decision until the loan term is complete. This allows companies to take advantage of low payments and off-balance-sheet equipment, while also protecting them against changes in technology.  At the end of the lease, if the company decides they want to keep the equipment, then they have the option to purchase it. Alternatively, if their business structure, product demand, or technology changes, they can simply return the equipment with no costs or penalties.

Best Practices For Financing Manufacturing Equipment

When arranging equipment finance, business owners should seek finance providers who adhere to the below best practices:

  • Financing Beyond Equipment:

    It’s important for manufacturers to work with a finance company that can handle the financing of more than just the equipment itself. Business owners can encounter drastic upfront expenditures, including installation of plumbing and electrical work; equipment transportation costs; software implementation; enterprise resource planning (ERP) systems; phone systems; and other costs associated with simply obtaining and installing the new equipment.  By working with an experienced equipment finance specialist, manufacturing companies can work to finance these additional elements along with their equipment.

  • Ability/Willingness to Make Progress Payments:

    Manufacturers should be certain that their financier is willing to handle progress payments.  Banks may not be willing to pay soft costs up front, and instead will have the borrower pay all vendors, and then plan to pay the borrower back at a later date.  Alternatively, financiers that offer progress payments streamline this process, and work directly with vendors to pay off costs up front, often before a borrower even makes the first payment on their lease.

  • Flexible Finance Structures:

    Owners should ensure that their equipment finance provider has flexibility when it comes to structuring their financing. The fact is, while many business owners look first at interest rates, the structure of a loan can be equally as important when it comes to managing company finances.  Good equipment financiers should be able to tailor a financing solution to fit the needs of each specific business and financial situation. Often, large banks and other finance providers can offer only two or three different structures, while independent companies can often tailor solutions as needed.

The Bottom Line

Onshoring in the manufacturing industry is a growing trend that is here to stay.  Consumers are increasingly aware of where products are coming from, and will no longer accept low quality, even at a low price. This is especially true as the economy improves and consumers become increasingly sophisticated. Manufacturing companies will continue to move their operations to the U.S. to ensure that product quality is maintained, and these companies will also continue to work to ensure that manufacturing costs stay low.
    As this activity grows, equipment finance will be a priority for manufacturing companies over the next five to ten years.  With a strong supply of financing and numerous options available,  manufacturing companies should feel at ease knowing they can onshore their operations and secure the financing they need in the U.S.  As this trend increases, working with a qualified, flexible and customer-oriented equipment finance specialist will become more important than ever for manufacturing companies in the U.S.

Eric Freeman is Vice President of Summit Funding Group, an Ohio-based company that provides equipment lease and finance solutions to businesses across the U.S. and Canada. He has more than 12 years of experience in equipment finance and has completed billions of dollars in financing transactions throughout his career. Contact him at [email protected]  

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