You can take it to the bank

38_bank_01When considering a machinery purchase, the price and how to pay for it probably come to mind first. But before doling out cash or writing a check, read on.

The case can be made that financing is the best way to go, even if you're lucky enough to have the full purchase price in your pocket. The reasons are pretty straightforward: the interest fees of leasing to own are hardly the threat they once were, there are substantial tax deductions to be had and your cash flow will improve. But there are also generous warranty and technical support plans available to those who finance.

Sources

Biesse at www.biesseamerica.com

Geneva Capital at

www.gogenevacapital.com

Grizzly Industrial at www.grizzly.com

SCM Group at www.scmgroup-usa.com

Stiles Machinery at

www.stilesmachinery.com

Susquehanna Commercial Finance

at www.susquehanna.net/scf/

Financing can be arranged directly through a financial institution or through a product manufacturer's in-house financing department that facilitates the loan application process between customers and banks. If you can find a manufacturer with this in-house service, you're in good hands. The good news is that more woodworking industry manufacturers are offering this brokerage service.

The financing representatives in these departments are skilled at translating lending terminology to borrowers. More importantly, they also know how to justify to the bank a borrower's need for purchasing a CNC router, edgebander or other piece of much-needed equipment.

An attractive option

Some of the major woodworking manufacturers with in-house financing services include Stiles Machinery, Biesse, SCM and Grizzly, to name a few. Most provide online applications to get the process started.

Tim Northup, corporate controller for Stiles Machinery, says the internal lending branch at Stiles has been in place for a number of years, but has recently been busier than usual. He says there are certain components about financing that make it an attractive option, even if you have the cash to go out and write the check.

"Naturally in this environment, we say that cash is king, so a lot of the times we are encouraging customers to maintain that cash for different things like working or operational cash flow to have those reserves to pull upon," says Northup.

Financing also allows customers to pay for their goods during the duration of the time that they use it. Northup says borrowers get great satisfaction being able to look at their installation payments as commensurate with the usage or return they're getting on the machine.

Beyond that, there are tax benefits. Under section 179 of the Internal Revenue Code, taxpayers can write off a fixed amount of capital expenditures each year. The benefit allows a shop to immediately depreciate an asset - such as a piece of woodworking equipment - after purchasing it, despite the fact that it may not be paid for.

"A company can go out and lease a piece of equipment, but yet get the full benefit of depreciation under this concept of section 179 accelerated depreciation and get all of the tax benefits up front and essentially create that positive cash flow," says Northup

Lending trends

At Stiles, about 30 percent of the machines sold are financed. Northup says that number has increased in the last 18 months as a result of lenders posing more stringent requirements for personal property to be rendered as collateral. Banks have pulled back in terms of their risk tolerance to offer credit, so as a result, they require more historical performance and/or documentation.

"What we're finding from many of the partners in the banking industry is that the woodworking environment, the industry as a whole, is certainly one that is reviewed much more stringently than other industries as a result of its close tie to housing," says Northup.

"In the past, bankers would be willing to originate business loans fairly easily, but not today," adds John Marrazzo, senior account executive at Susquehanna Commercial Lending, which provides direct lending for lease-to-purchase plans for various woodworking manufacturers, such as Felder USA, Biesse, Stiles, Adwood, SCM, Tiger Stop, Roger Shaw and Associates, Delmac and Ellison Technologies. "A few years back, banks would lend on a signature loan and past relationship, or secure the loan with additional collateral such as real estate or compensating bank balances. Today it is very difficult to get a bank loan even when real estate is being offered."

Since lenders are being selective, why shouldn't you be? Marrazzo offers a few words of advice for choosing a lender.

"At all costs, avoid lenders that call or mail you with a pre-approval notice. Also, beware of leasing companies that call you out of the blue after you have already submitted an application to another leasing company. These leasing companies are the king of bait-and-switch. They'll typically want a deposit up front, delay the application process and keep your deposit."

The moral of the story is if it's too good to be true, it probably is. A smart businessperson will go with the leasing company the vendor recommends or use a leasing company they have used in the past.

Getting started

In today's market, conventional financing requires a 36- to 84-month payment plan at interest of 6 to 7 percent, which could be higher for borrowers with poor credit. You make all the payments and own the machine. It's also common practice to lease, but there's a significant difference. Leasing usually requires a fixed number of payments throughout the duration of the lease, thus prohibiting the practice of paying the loan off early.

Most financing forays begin with an application and credit check. Based on the outcome of that credit check, there could be some additional information that's required such as personal financial statements, federal tax returns, business plans and projections, and a measure of historical performance that states a company's standing and how long it's been in business. Many lenders get their information from the Dun & Bradstreet reports, a global credit reporting system for businesses.

In the event a loan can't be repaid, companies are more than willing to work with the consumer, and it's always recommended that one speak up early if there's a payment problem.

"For those customers that we finance internally, the last thing we want to do is repossess the machine. We don't want to take it back any more than the customer wants to give it back. So we'll create different payment plans that can afford getting through some more challenging times," says Northup.

Other financing options

  • Step leases feature payment amounts that vary according to a predetermined schedule. The payments increase or decrease - or both - during the term of the lease. A step lease with increasing payments can be beneficial for a business that's acquiring an income-producing piece of equipment that will earn little or no revenue at first, but which will produce higher levels of revenue in the future.
  • Deferred payments have to do with debts that are created today, but are not due for payment until some agreed-upon date in the future. The future process of payment may involve settling the entire debt on or before a specified date, or may be structured by commencing installment payments that will begin on a future date and continue until the debt is fully retired. Use of a deferred payment strategy allows the debtor to receive the benefit of a good or service now rather than having to pay for the service in full at the present time.
  • Rent-to-own typically requires a short-term payment obligation with an option to buy at the end. A portion or all of the monthly payments are applied to the sale price of the machine.
  • Month-to-month rentals are available for short-term needs, but you can expect to pay a premium rate.
  • An equipment upgrade lease is for shops that prefer to upgrade their equipment every few years.

How companies determine financing

Financing is available from several woodworking manufacturers and their dealers. Woodshop News focused on some of the big-ticket machinery producers for this article, including Biesse, which has been offering in-house financing since 1996, and Stiles.

42_bank_02"We finance equipment and accessories for end-users based on their business needs and cash flows, as well as tax implications that may affect their bottom line," says Stan Ragley, manager of Biesse Finance in the U.S. and Canada, who adds that he does much more than simply relay the benefits of financing to customers. He works closely with them to gain an understanding of how the equipment will be used and how their businesses will benefit.

"I'm here to work firsthand with customers that have questions," Ragley says. "We let them know what their financing options are. I've been in the woodworking industry the past 21 years, combined with 15 years in the equipment financing industry, so I know how the equipment works and how to help customers justify their purchase."

SCM Group's leasing advantages include an application-only program and customized payment structures such as no money down and deferred payments.

Grizzly, which sells direct to the customer, offers lease financing options for purchases of $5,000 or more.

"In addition to providing high-quality products, competitive prices and top-notch service, one of Grizzly Industrial's goals is to provide our customers with payment options that meet their needs," says Grizzly CFO Colleen Lahr. "We've offered lease financing for over 10 years, and offer online applications and payment calculators on our website.

"Many factors influence the decision to extend credit to a customer. We require each applicant to have three years or more business history. We consider their past credit history and rely on the information we receive from our Dun & Bradstreet reports. We also consider the credit limits they have with other businesses in establishing the amount of credit we will extend."

This article originally appeared in the August 2010 issue.