A common question that comes up with nearly all of our customers is, “Why choose a non-bank lender?” After all, banks have access to the most inexpensive capital, in theory have no limits on how much they can lend, and have all of the resources in the world to make borrowing money both fast and simple, right? Like most theories, it is feasible, but in practical application doesn’t usually work for most customers seeking machine tool financing. Here’s why.
Banks like liquidity – that is lots of cash on hand. Most machine tool financing transactions are with customers that by design do not have a lot of cash on hand. Machine shops are one of the most receivable intensive categories of customers we lend to, meaning their balance sheet is way more likely to show a large accounts receivable balance as opposed to cash reserves. If you think about the logic behind how a shop full of machine tools operates, it’s easy to comprehend why. For starters, machine shops often need to make a lot of product in advance of being paid. This means they have to expend cash on materials and inventory with a long lead time to create finished product, and even longer set of terms before they can receive payment in full.
Besides wanting to see cash on the balance sheet, banks also like to touch it. In other words, for older machine tools expect to see a down payment requirement of 10-20% easily. That means you’re no longer just vying to get an approval by demonstrating liquidity, you’re actually risking your liquidity and giving up access to vital working capital you may need to produce product just to obtain financing.
Alternative and non-bank lenders finance machine tools based on the value of equipment and potential to earn income, not just on a strong balance sheet. That means if you buy something like a horizontal machining center or CNC machine that has a strong intrinsic value, you have an easier path to financing even if your current cash flow isn’t particularly strong. Machine tool loans are very desirable for a lender, because there’s a huge market for resale of the collateral and the equipment tends to depreciate very slowly, unlike, say, a used truck on a piece of construction equipment.
In a business completely built around production deadlines, it’s easy to understand why it’s important to cut down on the turnaround time from selecting a machine to implementation of a tool in the shop. According to Business Money Today, the average bank takes around 45-60 days to process your commercial loan application, and that’s assuming you provide everything they require upfront. With the average lead time of a machined product being 30 days, shops could see as many as two product cycles go by without being able to access their lathe, press, or other machine tool. The lost productivity alone is probably more than the interest savings over the life of the loan they’d gain by choosing a bank.
Our average turnaround time for most machine tool loans and leases is just ten business days from application to funding. Moreover, with our creative purchase order and prefunding arrangements, we’re often able to get a vendor to deliver a machine tool to our customer even prior to funding, cutting down on losses in productivity.
When customers first apply for a machine tool finance transaction, we usually expect to hear questions about rate and terms. This is because customers have been programmed to ask the basic question: “What’s the interest rate?” What’s particularly jarring about the campaign to cram customers into one line of questioning is that it’s a dishonest way to ask customers to evaluate a deal. ‘Rate’ is calculated in five or six different ways, whether it’s buy rate, sell rate, per year yield, APR, simple interest rate, payback as a percentage of the loan, or some kind of rate factor, none of these numbers tell a customer anything tangible about a transaction.
So when a bank offers a ‘low rate,’ we always ask the customer to consider the tangibles. Will they report to your personal credit? If so, have you considered that this may leverage your credit personally, keeping you from buying a new car or refinancing your home? Will they file a blanket lien, essentially encumbering all of your business and personal assets in the process? Will they cross-collateralize against your bank accounts, giving them free reign to transfer money from your checking account if you ever fall behind on payments?
Financing with an alternative lender ensures you still have access to credit exposure with your bank personally and commercially, allowing you to use bank funds for operating expenses and working capital, items that are more capital intensive over time, and that don’t have offsetting, predictable return on investment metrics. Buying inputs for a run in your machine shop is a recurring priority that you’ll need your bank relationship for, so it makes sense to use an outside lender for capital expenditures like adding a new press brake or mill.
Banks are set up very differently than in house machine tool financing programs. They are designed to protect a very narrow credit window by ensuring you fit inside every box. Our machine tool financing programs, contrarily, are designed to find ways to include customers conventionally excluded by most mainstream lenders. This includes unconventional profile customers seeking a machine tool loan, including:
Being philosophically programmed to build creative structure around transactions to offer approvals that banks can’t gives us a major advantage in the B, C, and even D credit spaces, but we often find ways to help our A credit customers when the bank drops the hammer due to their lending policies.
Not all banks are created equal. Some can and do approve machine tool deals at decent terms. Understanding that banks might require you to sacrifice time, leverage, and operating cash can help you weigh the decision of how best to proceed – especially knowing that a lot of banks end up saying no when the process is all said and done. Nonbank lenders are eager to compete for your business and will be more willing to make exceptions that banks cannot, while still giving you the flexibility to utilize your bank exposure for daily and monthly recurring operating costs.
At American Leasing & Financial, we’re so passionate about machine tools (and financing for machine shops and their tooling needs in general), that we actually created a special financing program just for machine tools. Machine Tools Finance.com is a niche funding processor backed by two dozen boutique funding sources and banks, as well as our own in-house funding arm American Leasefund. We pride ourselves on offering flexible cnc, mill, press, and other machine lending programs, regardless of credit issues, for startups and established businesses alike. Learn more at www.machinetoolsfinance.com OR apply now for an easy approval in as little as 24 hours.