It’s a challenging time to consider a big investment. With rising interest rates and the highest interest rates since 2001, fewer people are willing to risk investing in big purchases like a house or car—or a new CNC machine. Today’s interest rates increase the cost and associated risk of such investments.
But that doesn’t have to be the case. DMS recently spoke with long-time partner Larry Moller from Anthem Capital Group to pick his brain about the state of the economy and its effect on manufacturers looking to purchase a new CNC machine. Anthem specializes in financing manufacturing equipment, and through the years they have successfully facilitated DMS purchases for a variety of manufacturing companies.
Investing in a new CNC machine can feel increasingly risky with higher interest rates and the risk of a potential recession looming. But manufacturers can feel confident in their choice if they consider these important factors.
Is this the right time for a big investment?
In the past two years interest rates have increased dramatically, but that doesn’t mean a new CNC machine is off-the-table. Having worked in financing for several decades, Moller has seen his fair share of up and down business cycles. From what he’s observed, he does not believe the much anticipated economic downturn, if it does happen, will be as severe as ones we have weathered in the past.
But no one has a crystal ball. Manufacturers looking to purchase a new CNC machine must consider things from all angles—just as they have always done. Rather than getting stuck in speculations about the future, businesses looking to purchase a new CNC machine should:
- Vet the justification for the equipment. As with any large purchase, a cost-benefit analysis is a good place to start. How long will it take to see returns on this investment? This question must account for all the expenses involved in a new machine—including ongoing operating costs—as well as the projected gains in clientele and additional contracts.
- Seek out a financing specialist. Before signing for a bank loan, we recommend evaluating several options. At DMS we have found that a private lender is often the best route for our customers. Lenders that specialize in financing manufacturing equipment often offer optimal rates and terms, and they are more flexible in tailoring a plan to their customers’ needs.
- Evaluate the acquisition in light of uncertainty. When considering a CNC purchase, it is important to consider the possibility of changes in your business or the overall economy. Can your business stay afloat if you lose a big client? How will a financing agreement impact cashflow during strong and soft business cycles? Businesses should never assume the best or the worst, but they need to be prepared for either.
What are lenders looking for?
Lenders focus on the economy just as buyers do, and before they agree to a loan they want to see signs of stability in borrowers’ financial records. Manufacturers can better prepare for a big purchase if they anticipate lenders’ expectations.
These four factors will likely come into play:
- Time in business — Does your company have sufficient time in business with proven income?
- Credit of the company — Does your company have good credit, and are bank balances sufficient to cover rent, payroll, monthly loan payments, and other large expenses?
- Credit of the owner — For smaller businesses, is the owner’s credit strong enough to justify a large expense?
- Comparable borrowings — Does your company have loans in place for other equipment that demonstrates a good borrowing and payment history?
It’s worth noting that manufacturing companies who are not immediately approved for a loan may still be able to find financing. By paying down existing credit card debt and improving bank balances for three months, businesses can quickly improve their chances of success. This can also lead to lower interest rates and more flexible terms. Anthem can help you position your company for optimal rates and terms.
How should I finance?
When choosing whether to finance your CNC machine through a bank or a lending institution like Anthem Capital, there are several factors to consider.
A bank often has more stringent approval processes, while financing through a private lender may prove to be more expedient. Banks typically require two or three years of business financial statements, tax returns from both the business and owner, as well as a debt schedule, personal financial statements from the owner and other information. By contrast, Anthem Capital Group usually asks for a one-page credit application and the most recent three months of business checking account statements when financing up to $500,000. This means that Anthem’s approval process can take as little as 1 to 2 days instead of weeks.
The second consideration is the loan itself. Anthem may be able to finance an equipment purchase at lower interest rates than many banks, and their coverage is often more comprehensive. Banks may often ask for a significant down payment, which can be a huge investment for most companies, significantly draining current cash flow. By contrast, Anthem Capital Group usually approves their customers with no money down, offering a variety of programs tailored to each specific customer’s needs, including:
- Equipment loans
- A $1.00 Buyout Lease
- 10%, 20%, or fair market value leases
- Deferred and step-payment options
- Working capital loans
Lastly, it is important to consider what expenses the financing entity will cover. Anthem will often finance the entirety of a CNC purchase, including freight, dust collection, and other necessary items. A bank is more likely to approve financing for the machine alone.
Of course, there is no one-size-fits-all solution for your business. Banks and lending institutions offer a variety of options for their clients, so it is important to consult your accountant to see what structure works best for you.
Our team at DMS would also be happy to have a conversation about your next CNC machine. We’ve lost count of all the manufacturers we’ve helped find the financing they needed for a big investment in their future. We’d love to help you do the same.
