Really? I didn’t know that about equipment leasing

The other day I was breaking in a new machine tool Sales Rep and we made a call on a small mold repair shop in the Southeast. Nice place and clean as a whistle with three machinists, several manual machines, a knee mill retrofit, one older CNC lathe and two well-used sinker EDM’s.

Business was good and they were kicking around the purchase of their first new machine, a small VMC to make aluminum mold inserts, cores and cavities. After the obligatory “how’s business and do you know so-and-so?” the conversation got more serious. Heck, it was their first new machine so it would be a box-stock machine with no options.

“What’s your shop rate?” I asked.

“Varies, depending on the job, but we try to get about $75 and hour,” replied the owner.

I glanced over at a guy changing tools on the knee mill retrofit. By the time he hit cycle start, used an air gun to blow off some chips and adjusted the small dribble of cutting oil on the end mill it took about a minute.

“This new mill will have much higher spindle RPM and horsepower. It’ll have an enclosure, and you can run much higher coolant pressure” I commented, nodding in the direction of the guy on the mill. “Also, he won’t have to be standing there waiting to change tools if you get an automatic tool changer.”

The owner scratched his jaw and asked how much for the tool changer option.

When I gave him the cost of the option, the owner said, “too much, can’t afford it”.

“How much is too much,” I asked, “especially if it paid for itself in the first week every month?” then I added, “the next three weeks would be gravy”.

“Not sure I follow.”

“Let’s do the math.”

Again I nodded in the direction of the machinist at the nearby mill. “You’re getting $75 bucks an hour and let’s say that spindle is only making chips about 40 minutes every hour and nothing during lunch and other interruptions. Is it reasonable to say you’re losing an hour or two of revenue every day?”

The owner scratched his chin again and grudgingly nodded in agreement. He was still frowning a bit, but I could see the wheels turning.

“Let’s take it a step further. The addition of the tool changer option also frees up the machinist to be making you money on another machine while your new VMC is making money unattended”.

I pulled out my calculator and began punching in numbers; doing the math. “The leasing companies use a multiplier called a ‘Rate Factor’ to calculate the monthly cost of the lease,” I explained. “But it can also be used to figure the monthly, weekly or even hourly cost of a machine or option.”

“Just for the purpose of discussion, lets say you’re going to lease the machine for five years with a one dollar buy-out at the end. In that scenario, the automatic tool changer option would cost about $55 a month”.

The low number even surprised me so I ran the calc a second time. “Yep, $55 bucks a month,” I said. “Think I underestimated the payback. At your shop rate, that option will probably pay for itself before lunch on the first day of the month”.

The owner slowly nodded in agreement, scratched his chin and began to smile.

Out in the car as I was updating my notes and savoring the good vibes from helping make that shop owner’s life a little better, the young Sales Rep asked, “Tell me again, what’s a rate factor?”

After I gave him a quick recap, he said “Really?” the way people do when they’ve heard a good idea. “I didn’t know that about Equipment Leasing”.

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