Preparation is key
April 27, 2012
Capital expenditures are necessary for any successful manufacturing business. Stamping is no exception. Here are four easy ways for you to be well-prepared to apply for a loan to finance an unexpected (or planned) new equipment purchase.
Capital expenditures are necessary for any successful manufacturing business. Stamping is no exception. Today, especially, taking advantage of modern technological advances in presses and other equipment to lower production costs, increase capacity, and market capabilities can mean the difference between growth and the ugly alternative.
The general school of thought is that a new piece of equipment should be able to pay for itself. In some cases, the need for new equipment arises unexpectedly when old equipment breaks, costs too much money to repair and maintain, or becomes obsolete. However, most companies cannot afford to be without any one particular type of equipment for very long. Often, purchasing new equipment out of cash reserves is not realistic.
There are a few easy ways for a stamper to prepare well to apply for a loan to finance an unexpected (or planned) new equipment purchase. Start by asking yourself the following questions:
Q: How can I prepare so that the loan application process is as efficient and streamlined as possible?
A: You should have all required financial documents ready. Typically, you will be required to provide three years of business tax returns; three years of personal tax returns for guarantors; two to three years of CPA-prepared financial statements (typically in a compilation format or an audit/review, depending on the size of your business); three to six months of end-of-month accounts receivable and accounts payable aging reports; and three months of bank statements (if you are applying at an institution other than where you currently bank).
It is likely that the bank will have you fill out a formal loan application or personal financial statement. Therefore, it will be helpful to have a statement of your personal financial condition detailing your assets and liabilities already prepared.
Let your accountant know that you are preparing to apply for a loan, and ask him or her to answer questions directly from your banker regarding the financial statements. By doing this, you will not be bogged down by having to answer questions about specific line items on your statements and tax returns when a bank’s credit department begins its underwriting process. Let your accountant answer these questions on your behalf.
Q: What types of questions can I expect a banker to ask me about my business operations, financial results, projections, and so forth?
A: If you are applying for a loan from a financial institution that does not have prior information about you and your business, you will need to provide background about where you have been, where you are now, and where you anticipate going in the future. This information may include significant challenges your targeted market has faced in recent years, what strategies you employed to conquer those challenges, and how you are positioning yourself to grow within your niche market going forward.
Be prepared to communicate to the loan officer the following:
Q: What type of loan is best for me?
A: It depends. If you are a relatively small stamping company, you may need to purchase equipment only once every five to 10 years. An equipment-specific term loan may be your best—or even your only—option. Depending on the lender you choose and its specific loan policy, you likely will be required to make a down payment on the purchase price of the equipment (10 to 25 percent). The length of the term loan can vary, however. Again, depending on the lender, a term of three to 10 years on equipment purchases may be required.
If yours is a large stamping company that makes regular purchases of new equipment, you may want to inquire about a “CAPEX” (capital expenditure) line of credit. This type of loan is designed to give you a little bit more freedom to make purchases through an already established loan. You probably will need to present the purchase invoice to your banker to borrow up to a certain percentage of the purchase price.
Then, amounts advanced on the line of credit may be eligible for transfer to a separate term loan requiring monthly payments of principal and interest.
A third option is to pursue a finance lease in which the financial institution agrees to purchase the equipment and lease it to you for a period of time. At the end of the lease, after all the payments have been made, you will be allowed to purchase the equipment for a nominal amount (typically $1).
Q: How do I position my business’s finances to give me the best opportunity to obtain a loan, either for working capital or for an equipment purchase?
A: Financial institutions look at a variety of things, including your gross and net profitability and operating cash flow; liquidity of your current assets and your liabilities; overall leverage, which is your debt to net worth; and tangible net worth and retained earnings.
Because accountants and bankers both tend to see many different companies’ financial statements, they may be in a good position to offer comparative information. Work with your accountant to see how you compare with others in the stamping industry. While this practice may make it easier for you to obtain financing, you can potentially use this strategy to gain a competitive edge in your industry as well.