Monday 29th Oct 2018
Financing New Engineering Equipment: Your Funding Options
02 May 2018
The engineering and manufacturing industries are some of the most competitive, with tight margins and high overheads. For this reason, it can be particularly difficult deciding when to expand or invest in new staff, equipment or premises. Cash isn’t always readily available. The problem is that investment is essential - if a business is relying on machinery and other equipment to provide goods to customers, it’s at the mercy of technological development. As soon as one competitor is able to invest in better equipment, it will naturally have an edge in the market.
If investment is essential for success, then how do businesses with tight margins afford it? In general, the answer is that they have to be clever with their sources of funding - often finding the cheapest possible way of financing their new equipment. There are quite a few ways of doing this, and before we continue, it’s certainly worth noting that for larger purchases, it’s very important to think about the tax implications too - different methods of recording your investment will yield different results tax wise, so it’s always a good idea to consult an expert first, even if you understand the outright costs of finance.
The first, and likely most obvious method of raising cash to pay for new equipment is a loan. This can either come from a third party such as your bank or a specialist lender, or the retailer themselves might have finance options for more expensive pieces of machinery. This is the most straightforward option, but it can also be the most expensive in many cases. Loans are not always cheap in the current economic climate, and depending on the equipment you’re buying, you’re very likely to be taking on a depreciating asset. However, with a good rate, and a good eye for depreciation, loans are an effective choice that can be quickly outweighed by the benefits of new equipment. Overdrafts are a similar option here, but aren’t always large or flexible enough, and often carry larger costs.
The next most likely option for funding are leasing or hire purchase schemes. These mean monthly payments to either essentially rent, or part-purchase the equipment. Generally they’re only offered on more expensive items, but they can be particularly tax effective, depending on whether you’re looking to avoid the hit of depreciation, or you’d prefer to have an asset on your books that you know will hold its value. Good research will need to be done in advance to workout whether these are effective choices, but the prevalence of such schemes for company cars should tell you how popular they are.
Perhaps one of the best options for successful engineering firms is invoice finance, because it’s likely that this will be one of the cheaper methods of funding. It’s also considerably different to traditional forms of lending, and won’t be suitable for all businesses. In short, invoice finance is all about very rapidly realising the cash tied up in your invoices. So rather than borrowing knowing that you’ll make the money to repay the loan in the future, you’re borrowing money equivalent to invoices that are already owed to you, but which haven’t yet been paid. This can be a cost-effective way of ensuring you have cash readily available, though you should always research the fees, and it’s important to note that this is likely to be only a good choice for businesses who are running well aside from difficulties with cash flow. If you don’t have plentiful invoices to fund your business, invoice finance will be ineffective.
The takeaway then is that there are a variety of options out there, but you really need to sit down and work out which is most effective. Think long term, take tax into account, and you should be able to find a method that allows you to take advantage of the benefits of new equipment, without taking too much of a hit to your monthly overheads.