Financing: Reader questions get expert answers

Editor’s Note: In this issue, Canadian Metalworking invited shop owners from across the country to submit leasing/financing questions to be answered by expert Ken Hurwitz. This is a selection of the most common themes and most interesting questions. To get your questions answered in a future issue, please send them to Editor Joe Thompson at jthompson@canadianmetalworking.com.

Q: Why should I get a financing approval before I even know the final cost of the machine I want?

A: The main reason to get pre-approved is that it allows you to understand how much funding is available.

Second, you know ahead of time what the monthly payment, term, and structure will be, so it becomes a simple business decision as to whether or not to proceed.

Sourcing the right equipment for a particular job can be a very time-consuming process. Visiting installations, reviewing time studies, and perhaps seeing a part runoff all take time. If the machine’s price is far beyond what your credit profile will allow, then that time is wasted.

Normally I tell my clients to get started with a pre-approval once they are serious about investing in a new machine. However, having a final quote is not necessary.

For a funding application, lenders that are familiar with the manufacturing industry only need some basic information: manufacturer, model, basic details, and list price for the machine that you want. All of this can be confirmed early in the process. If the model changes or the price goes up 10 or 15 per cent, it is rarely an issue.

Q: What paperwork do I need to submit to my lender to get an approval?

A: After you complete a one- or two-page credit application, the lender will review your financial statements.

I always recommend that my clients use a registered accountant from a quality firm for this. The quality of the financial report that they produce is high, and a well-prepared report provides much more comfort to a potential lender.

If the financial report is more than six months old, an internally prepared report for the current financial year also may be required. This can be prepared using QuickBooks or Sage (formerly Simply Accounting). If an internal report is not available, then current bank statements serve the same purpose.

The lender then reviews both the commercial and personal credit reports using Equifax; Dun & Bradstreet; or PayNet, which is a service that deals exclusively with the leasing industry and shows how a potential lessee has paid its current leases.

Personal credit reports are needed when the application includes the guarantee of an owner or majority shareholder. These reports provide a significant amount of information on the individual, including how long they have been on file, the number of trades, how much credit they have been extended by their bank and credit card companies, and, most importantly, their repayment history.

These reports also provide information regarding any legal or collection history.

It is important that lease applicants know the information on their credit report. If there is any negative activity, it should be shared with the lender so that there are no surprises.

Q: My machine is being repossessed. What are my options?

A: Repossession always is a lender’s last resort.

When a transaction is approved, it’s a lender’s hope (and the client’s) that the transaction will be paid back in full without any problems. However, it’s important to note that when the unforeseen occurs, like COVID-19, lenders will try everything possible to avoid taking equipment back.

During the pandemic, payment postponement and short-term reduced monthly payments were common. But at some point, there is nothing left for a lender to offer.

If you are at the repossession stage, then all of the alternatives likely have been exhausted and the machine is going back. But you still have some work to do.

First, it is in your best interests to ensure that the machine is in good working order, properly prepared for shipping, and moved by experienced riggers and truckers because the next step for lenders once they have the machine is to get it sold. Lenders want the machine sold in a timely manner to recover what they are owed. In a perfect world, the amount they receive will pay off the entire outstanding debt.

Another alternative is to find another shop that could use the machine and have them submit an application to the lender in the hopes that they can pick up the remaining payments or arrange a new lease. Either option wipes out the existing debt. Also, make sure to do some research to see what the machine is worth.

Q: My material costs per project are really high. Is there any way to finance these purchases?

A: Yes, but it is not structured in the form of an equipment lease.

When a shop lands a big project, one option for handling a large amount of immediate costs is arranging a short-term business loan. Because this is not a leasing question, I asked Oliver Cordes, senior account executive, Vault Credit Corp., Toronto, for his thoughts.

“A business loan allows you to keep your cash in your pocket, [and] our working capital program can have funds in your account within 24 hours,” said Cordes. “The loan is not secured or collateralized to any specific assets, equipment, or receivables. A number of Canadian manufacturers have found this the perfect fit for purchasing inventory or materials to start a project before the revenues flow in.”

Ken Hurwitz is vice-president, Equilease Corp., 416-499-2449, ken@equilease.com, www.equilease.com.