Financing of machine tools and other capital equipment

Financing machine tools has become more and more of a headache for many engineering companies, and the new Credit Act, implemented in 2007, is widely blamed for that. Rising interest rates of course are a factor too. An increasing number of credit applications are rejected by the banks. Why is that so and what can be done about it?

Since the implementation of the new Credit Act, “affordability” is what it all revolves around. A company applying for finance has to present financials showing that the business is profitable and can afford the credit repayments that would result from a finance agreement. In the past it was, mainly for tax purposes, generally desirable for businesses to show as little profit as possible. That of course did not mean that a business would not generate good revenue and be “profitable” in a more popular sense of the word. Under the new Credit Act however, financial institutions can be held accountable for lending money to clients who can clearly not afford the repayments. They consequently will not approve a loan unless a business can present strong financial statements.

So what options does a business have to finance new equipment?

Your “House Bank”

The obvious solution is of course to go apply for finance with the financial institution you are banking with. Absa, FNB, Standard Bank and Nedbank all offer products in that respect. There is however a downside to that. You probably have an overdraft facility, your credit card, a home loan and maybe car finance through that bank already. Borrowing money is always associated with a certain risk, even if a loan is secured, and your bank will at one stage not be prepared to take any more risk associated with your business. In addition to that your bargaining possibilities are generally limited in a well established business relationship. Other banks however are likely to be very keen to get your business and, provided your financial status is strong enough, might offer you a competitive deal in order to win you as a customer.

When applying for a loan, don’t just contact your banker. Shop around as you do with everything else you purchase and see where you can get the best deal – which by the way is not always the cheapest, rather the one that suits you and your business best!

Facilitators

Facilitators don’t lend their own money, but they will do all the paperwork and running around associated with applying for finance. They generally have facilities with one or more of the big four banks and do have, thanks to a bigger business volume, more bargaining power than you, even with your house bank! A facilitator’s service comes at no cost to the customer, he will be paid a commission from the bank if you sign a deal.

Rather than running around yourself, let the pro’s do that. They will get the application right first time and will make sure all the required supporting documents are submitted. This will safe you time and will usually get you a better deal as well!

Private Finance Institutions

There are a fair number of private finance institutions on the market, using their own money to finance deals. They are generally a lot more flexible and quicker to respond than conventional banks. A 24 hour response time, once all documentation is submitted, can be expected from most of these institutions. Most of them will also accept your machinery, provided obviously it is full paid off, as collateral in order to secure a loan. If your business does not qualify for financing with any of the four conventional banks, a private finance institution might still be interested in doing business with you!

The higher degree of flexibility unfortunately comes at a price – the interest rate is usually a bit higher.

What kind of financing is available?

The most common form of finance is fairly straight forward. The applicant submits a quotation or pro forma invoice for the capital equipment he/she seeks financing for to the financial institution of his/her choice. Together with the application, a number of supporting documents such as financial statements, balance sheets, bank statements etc are generally required. The financial institution, based on the submitted documentation, will then establish what repayments they belief the applicant can afford and offer an agreement accordingly. Usually a cash deposit of anywhere between 10 – 50% is required, the balance will be financed over a period of up to five years. Should the bankers come to conclusion that the applicant can not reasonably afford any repayments, the application will be declined. Despite the rather exorbitant costs of financing equipment, bankers are not known to easily take a risk, even less so since the implementation of the new Credit Act. It is therefore essential that the financials submitted with the application are rather strong.

Once a finance agreement is signed, the capital equipment purchased appears as an asset in your books, the outstanding loan amount including interest on the other hand as a liability.

Rent-to-Buy is a product offered by a relatively small number of financial institutions. The application procedure is much the same as described before; there are however some major differences once an agreement is reached. Rent-to-buy dealsusuaThe equipment financed is legally property of the financial institution, it will not appear as an asset in your books, and the