New equipment is more affordable than you think
Last week I got an email from a friend whose machine shop is just a few miles down the road. He asked me to check out a CNC machine tool manufacturer’s website. The CNC builder was offering great discounts and attractive equipment financing.
“What do you think?” he asked in the email, and went on to say, “I’m in the market and the sales rep is pushing their in-house machine financing program. You mentioned once that often these factory leases aren’t always the best option.”
I’m a face-to-face guy and rather than exchange emails, I suggested we meet for coffee at the local “café of mutual isolation” as I call it. You know, one of those busy coffeehouses where everybody is sequestered in their own little digital cone-of-silence. We managed to find a relatively quiet corner inside—it was a hot humid late-summer day in South Texas—with enough room for a laptop so we could go online and analyze the factory offer together.
“I know ¬¬this looks pretty good, but let’s run some numbers and see what we get. “How much are you planning to spend?”
“$60,000, give or take.”
“Let’s call it an even sixty grand. Round numbers are easier for this old brain,” I mumbled as I pulled up Intech Funding’s website and clicked on their Equipment Finance Calculator.
“Okay, at the factory’s 1.9 percent interest for 24 months, that comes to $2,550 a month”.
“How much work in process do you have right now and what kind of a backlog? The reason I’m asking is because there may be an opportunity to use equipment financing to get more for your money than with the promotional deals all these CNC machine tool builders are flashing on their websites right now.”
He did a little bit of scribbling on a napkin as he finished his coffee, then pushed the napkin across the table for me to see.
“About $220,000 in the shop right now,” he said. “We’ll finish that up before the end of the year. I’m guessing another $500,000 in backlog over the next six months. Pretty even split between milling and turning.”
“Are you profitable? Decent credit?”
“Yeah, doing okay on all counts, why?”
“You could do a lot more with that $2,550 a month payment for equipment financing”.
“Really?” he grunted as he assumed the classic pose of Rodin’s ‘The Thinker’, left elbow on the table and his chin resting on his fist. “Give me an example,” he said after a few moments of contemplation.
“Would any of your existing customers give you more work if you had, say, 5-Axis capability or the ability to do more complex turning parts that would require a Y-Axis lathe with live tooling? Are you getting RFQ’s for that kind of work that you have to no-bid?”
“Yeah, actually we do. Pretty often, in fact.”
“Based on Intech’s Equipment Finance Calculator…” I still had the lap top open on the Intech Funding site and tapped the screen, “you could spend, say, $180,000 and the monthly payment would be about $2,536, which is actually less per month than the factory deal.”
His eyes rolled. “How is that possible?” he asked.
I pointed to the last line on the calculator and adjusted the length of the lease to 24 months, the amount being financed back to $60,000 and the interest rate being advertised by the builder to 1.9%. The monthly payment matched his original estimate; $2,550.
“Now let’s plug in the $180,000 number, a 4.9% interest rate and go out to 84 months.” The result was a monthly payment of $2,536.
He went back to “The Thinker” pose. Then a slight smile came to his face. “I could cover that monthly payment in the first week every month,” he said, then added enthusiastically, “not to mention how much it would improve our capabilities.”
I closed the lap top and gathered up the empty cups. “And,” I said, “you can take the Section 179 deduction on this equipment if it gets installed before the end of the year.”
“Remind me again, what’s the 179 deduction?”
“Another discussion for another day”, I replied. “Better yet, call the folks at Intech Funding, I’m sure they can give you a detailed explanation.”