Has your press gone flat?
Has your CNC machine become DOA?
Is your bending brake bent out of shape?
If it’s time for some new equipment in your business, there are typically three ways to go from rust to rebirth.
* Equipment line of credit. “Different banks handle it differently, but typically a dollar amount is set up for a company to make equipment purchases over a certain timeframe,” says Kevin Rinehart, senior vice president of FirstMerit Bank. “At the end of the year, the outstanding balance would be termed out over a four- to five-year period.”
For example, a company might be given a $500,000 line of credit to purchase the equipment it needs in the next 12 months. Whatever has been spent at the end of that time is rolled into a five-year term loan.
“If someone is planning on more than one project or taking on equipment in different timeframes, it makes it easier to get everything done for the customer,” Rinehart says. “It’s a lot more convenient, and you don’t have to do a separate application for each piece of equipment. In the end, you’ll only have one payment rather than four or five.”
* Fixed-term loan. Term loans vary widely based on a company’s credit rating and financial statements.
“They typically run three to seven years,” says Rinehart. “The interest rates can float or be fixed as the customer desires. There will be a loan agreement that may have some loan covenants in it.”
With a fixed-term loan, the company books the asset on its balance sheet and records the loan as a liability, depreciates the equipment and deducts it as an expense.
Collateral requirements vary, with more established businesses required to offer nothing more than the equipment itself. Newer businesses or those with weaker balance sheets may be asked for additional collateral.
* Leasing. “When you get into leases, it gets more complicated,” says Rinehart. “Each decision on whether to lease or buy really needs to be made in light of the facts and circumstances for each transaction and for the type of business.”
While leasing may free up cash, it might also cause tax problems if it’s not structured properly. Leasing can also be used when equipment needs to be replaced regularly.
“This is very true if there is still value in the equipment at the end of the lease term,” says Rinehart. “If you get computer equipment and spread it out over five years, then the equipment is going to be obsolete and have no value at the end of the term. But if you do it on a two-year basis, then leasing is definitely advantageous because you can get in and out of the equipment before the value really starts to decline.”
Getting an equipment loan is no different than getting any other loan.
“Basically a bank is just looking for good business practices, a strong cash flow and one that is not highly leveraged,” says Rinehart. “A good management team with a good business plan helps, too.”
Loan amounts vary, but the low end is usually no less than $10,000, ranging up to hundreds of millions of dollars.
“Whenever you are considering buying or leasing equipment, you need to work in conjunction with your accountants, looking at all the factors that go into it and making a comparison between them,” says Rinehart. How to reach: www.firstmerit.com