Obtaining Finance for Manufacturers
Today, banks are not the only option for manufacturers when it comes to raising finance. Alan Johnson reports.
ASAN Australian manufacturer you will no doubt recognise this scenario: you are an SME and you have just negotiated a long-term, multi-million-dollar contract to manufacture thousands of widgets a month for the next five years, at a very good rate (for you).
The only problem is, you don't have all the necessary equipment and will need a special piece of machinery costing, say, $1.3m.
So it's off to your friendly (see TV ads) bank manager, only to be offered a loan at some exorbitant rate which requires you to put your house, car and all your possessions up as guarantee.
Well today, there are a number of other options worth exploring that are not connected to a bank.
Leasing
Though leasing has been around for decades, with most companies leasing their cars and trucks, some manufacturers may not be aware that they can benefit from financing their equipment needs through leasing, and not just the financing of large-scale production equipment.
Nick Aronson, GM at The Leasing Centre, explains that the outright purchase of equipment can be problematic.
"Not only does it involve a large outlay of funds, it also equates to paying for the future use and benefits of the machinery. Plus the upfront purchase of equipment through cash or a bank facility is not tax effective and restricts businesses from updating or changing equipment as new innovations hit the market," he said.
"Having a flexible finance facility option (leasing) in place for equipment has many advantages. Firstly, it allows businesses to spread payments over the useful life of the equipment.
"This is a bonus when managing cash flow and leaves the business with capital to invest into other areas. Additionally, finance facilities are often tax friendly with monthly payments 100% tax deductable if used for business purposes - making them a cost efficient way to finance new equipment.
"Just as important is what happens when the machinery comes to the end of its useful life. Manufacturing organisations need the flexibility to upgrade or replace equipment at any time, ensuring that they are not left with an out dated machine.
"This way, they can invest for growth - ensuring that they have the option to access market leading equipment that will enable them to develop and grow their businesses."
Daniel Moses, director with the Leasing Centre, advises manufacturers to work closely with their accountant and take their advice, rather than the banks'.
"When it comes to putting in place a flexible finance facility, manufacturing businesses should look to work with organisations like ourselves, who specialise in financing manufacturing equipment," Moses told Manufacturers' Monthly.
"Unlike banking institutions, these organisations are able to offer specific tailored solutions designed to secure the machinery and equipment required for growth, while making it tax effective, cash flow friendly and flexible.
"We believe every equipment finance strategy should be specifically designed to help bridge the gap between growth objectives and budget limitations, to ensure that organisations in the manufacturing sector get the best investment for their business. Companies like ourselves can add a lot of value; often we know better ways of financing equipment.
"Firstly, we don't charge for advice or for structuring. Plus from a tax perspective, if we structure it in the correct way, we can reduce the costs. A lot of it is understanding the after tax costs. You might spend $100 on a one type of equipment finance contract and get no tax reduction, but if you spend $120 you might only cost $70 after tax. That's a very crude example of what we can do."
Moses says forward financial planning is also very important.
"We like to work with our customers and understanding what their next 12 months requirements will be. Then we can put a master facility in place with an approval limit of $x, which doesn't cost anything to put in place and no obligation to use it. It just means they can start planning to secure the contracts or do their capital acquisition planning and know there is finance behind them," Moses said.