Obtain More Leads and Close More Deals: How to Leverage Equipment to Close More Manufacturing Financing Leads
By Howard M. Newman, President of Loeb
As published in the Commercial Factor, Fall 2011
Download a PDF of the Published Article
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As the turmoil in our economy's manufacturing sector continues to escalate, more and more manufacturers are no longer meeting traditional banks' lending criteria. This is a painful reality for some, but an opportunity for companies that, either now or down the road, factor or loan to manufacturing customers.
First, let's take a step back and understand the economic environment and current trends.
In the past three decades, there has been a great deal of speculation about the end of manufacturing and industry in the United States. But is manufacturing in the U.S. really declining? No! It's just becoming more automated. Because of this trend, more equipment financing is needed. This is one positive outcome of the current economic slowdown because it motivates companies to focus on efficiencies, creating the soaring productivity numbers reported here.
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Josh Feinman is the Chief Economist and Managing Director of Deutsche Asset Management, Americas and has released an interesting study comparing the decline in manufacturing jobs to output. "In the 1970s manufacturing jobs accounting for almost 40% of the jobs in the U.S., today it is less than 9% but output has increased twice as fast as another industry."
When we break down the costs of manufacturing, we find that the costs for construction, machinery, energy and raw materials are similar throughout the world. The major deferential in regional costs are labor and transportation. So, if a company can produce goods close to where its customers are located, it naturally saves on transportation. Remove labor from the cost equation, and a company can now compete with manufactures anywhere in the world.
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Per IndustryWeek magazine, manufacturing technology orders are up 101% from 2010. In August 2011, U.S. manufacturing technology orders totaled $460.61 million, according to the Association for Manufacturing Technology and the American Machine Tool Distributors' Association.
"Despite news reports that wider economic growth may be stagnating, the manufacturing technology industry is sustaining its momentum," said Douglas Woods, AMT president "With orders still up substantially over last year, there is clearly optimism within the industry as firms are seeing future growth opportunities that merit new capital investment."
Welcome to the age of "shoring" also known as "re-shoring," "on-shoring," "back-shoring" and home-shoring, however you want to describe it; it is the trend to bring manufacturing back to the good ol' U.S. of A.
This trend is great, but we all know that over the last five years we have seen automotive companies tumble, airline industry struggle, banks disappear and the industrial world falter. In today's environment many of these organizations that didn't invest heavily in process improvements are in the middle of turnarounds or workout situations. The industrial manufacturing space has been hit very hard over this time period and we have seen many smaller to mid-market companies fall out of the strike zone for the traditional and standard asset-based lenders. Banks tend to shy away from the term piece due to the highly volatile assets value. To be clear, by "assets" or "asset-based" lending, I am referring to equipment, finances or hard collateral you can touch.
This is where you stand to benefit, by closing more deals that take advantage of a perfect storm that combines the new reality of shoring with diminished back lending.
Since the 1970's, major banks have had asset-based divisions that provide their clients—which can be your clients—greater leverage than what traditional corporate financing usually provides. When a client no longer meets a bank's lending criteria, it is hard to replace only one part of that client's financing. Manufactures find themselves in a position to leverage everything they have, which, again, is where you come in. Help them make the transition to a new financing alternative and solve their financing puzzle by satisfying the conditions of their payoff letter or purchasing their note from the asset-based department, not just the Accounts Receivable, inventory or real estate departments.
Alternative financing companies (like you) can use term lenders that are comfortable with the asset values to create liquidity within the company. By leveraging the machinery along with the other assets, the company has additional cash on hand to streamline processes, buy additional equipment, increase the overall production of the company, or use the additional cash to help pay down their current Accounts Receivable or inventory lines. This can help a new alternative financing group come in and buy out the existing loan.
There are two different methods to do asset-based lending on machinery. There are term loans and Purchase-Leasebacks they are both very different structures and aren't applicable to all scenarios. The easiest way to understand the difference between these two types of structures is by comparing it to the buying or renting of a house. Depending on your situation, one is clearly better than the other.
Like buying a home, term loans help your clients maintain a strong balance sheet because the client will maintain ownership of the equipment. Since the ownership doesn't change, your client will retain the ability to write off the depreciation on tax filings. The negatives are that they can only expense the interest portion of the payment, rates are adjustable, and equipment is listed as an asset on the balance sheet with a corresponding liability.
Purchase leasebacks, however, are a process where, like a resident who rents a house; your client will sell the assets but will continue to be able to use the assets. This is helpful given that a purchase leaseback does not contain any qualifying financial covenants that are found in a term loan. Since this is structured as a lease the rate is fixed so there are no rate adjustment surprises. If a client has seasonal effects on his business, the lease structure can include custom unbalanced payments and flexible end-of-lease purchase options. For tax benefits, the entire lease payment can be expensed instead of just the interest portion, which is the case in a term loan. And finally, since a purchase leaseback can be structured to be off balance sheet financing, this can help improve financial ratios.
Machinery lending is a high-risk model because trends change, markets change, and customer demands change. The key to eliminating the risks associated with asset-based lending in the industrial marketplace is to partner with finance companies that are also involved in the buying and selling of those assets. A partner with established knowledge, experience, and history in industrial equipment can prove invaluable to mitigating issues with asset valuation and recovery.
