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. One positive outcome of the current economic slowdown is that it motivates companies to focus on efficiencies; creating the soaring productivity numbers reported in this article.
Josh Feinman, the Chief Economist and Managing Director of Deutsche Asset Management, Americas has released an interesting study comparing the decline in manufacturing jobs to output. “In the 1970s manufacturing jobs accounted 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 differentials in regional costs are labor and transportation. So, if a company can produce goods near its customers, it naturally saves on transportation. Remove labor from the cost equation, and a company can now compete with manufacturers anywhere in the world.
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 “reshoring,” “on-shoring,” “back-shoring” and “home-shoring.” However you want to describe it, it’s the trend to bring manufacturing back to the good ol’ U.S. of A.
By leveraging machinery along with the other assets, manufacturers have 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.
There are two different methods to do asset-based lending on machinery. There are term loans and Purchase Leasebacks — both are very different structures and are not applicable to all scenarios. The easiest way to understand the difference between these is by comparing it to buying or renting a house. Depending on your situation, one is clearly better than the other.
Like buying a home, term loans help you maintain a strong balance sheet because you will maintain ownership of the equipment and retain the ability to write off the depreciation on tax filings. The negatives are that you can only expense the interest portion of the payment, the rates are adjustable, and equipment is listed as an asset on the balance sheet with the corresponding liability.
Purchase Leasebacks, however, is a process where you sell the assets but will continue to have access to use them, similar to selling your house, but renting it from the new owner. 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 you have seasonal effects on your 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. Finally, a Purchase Leaseback can be structured to be off-balance sheet financing which can help improve financial ratios.
Whether it’s a matter of needing cash on the balance sheet or a need to restructure debt, if your company is no longer able to meet a bank’s lending standards, and equipment term loan or Purchase Leaseback from Loeb Term Solutions or Loeb Financial Services is the answer. Let us be the key to unlocking equity from your machinery and equipment.