Financing Big Equipment Purchases

      Don't look for long-term loans equipment should pay for itself inside of five years. January 22, 2006

Question
I am looking to buy some expensive equipment for my cabinet shop. The new equipment would help automate the processes we use to make parts and would also help improve accuracy. I am looking for a funding source that would give me longer terms than a traditional bank or leasing company would give. A bank or lease company is only going to give me five or seven years to pay off the equipment. I need longer terms than that, so I can get the monthly payment down lower. I have tried the SBA in the past, but they really were not any help. Any suggestions?

Forum Responses
(Business and Management Forum)
Typically, the payback period is 5 years or less on equipment. By that, I mean that the equipment will make the additional money needed to pay for itself in less than 5 years. It must pay its way or there is no reason to have it. To stretch it out any longer means you will pay much more for the equipment (interest) and it is not paying its way. This equipment should help you do larger volume or have faster cycles, less labor or whatever. Add up these factors to determine what kind of savings you get with the equipment. This is basic cost justification.



I agree that if it will take that long to pay for the equipment, you probably won't be doing enough volume to justify buying it. Wise equipment purchases should pay for themselves in 5 years or less. Sounds like you are talking about more than one tool. Maybe you could scale back and buy less at a time. I am a firm believer in borrowing for equipment, as opposed to going without until you have cash up front, but the equipment has to pay for itself in a reasonable time.


I agree with the above. We're financed with an SBA loan and it has been an excellent experience. The equipment you buy should not be expensive; that implies it costs a lot relative to what it does. Buy equipment that gives you a lot of bang for the buck. Our $17,000 sliding table saw does nearly as good a job as other sliders costing $45,000. I can't imagine anyone other than a friend or private investor would give you terms longer than 7 years, which is a standard term for straight-line depreciation.


It sounds like you're a smaller shop wanting to grow. New equipment should pay for itself, as the others have said, in 5 years or less. But if it's just you and a helper, you can't possibly keep this new equipment operating at a pace needed to pay for itself. So the next step is hiring people that will.

You're in a tight spot. Used equipment would be a serious option here. And as a previous post stated, buy one piece at a time. Growth is good. Too much too soon is where all that good, reasonably priced, used equipment often comes from.



Yes, that is the general rule of thumb - 5 years to pay for the business liabilities or equipment attached to the upfront costs... or forget it. See your county chamber of commerce for a business plan consultant. Whether you are a new start or an upgrade to existing business, the COC. will want to work with you. Going rate in my western NY county is -1 under prime rate... Try to beat it. Right now, that means 5.25 on a 5 year loan. My county happens to have a $25,000 ceiling and that suits my personal (professional) needs for the time being. Here's the kicker. If you can show the plan in conservative and realistic terms, they love it. If you can offer diversity to the community, they love it more (I'm not starting another pizza parlor or beauty salon +++). Manufacturing is a real buzz word in NY right now, so furniture making falls into that category. And, if you can show the potential for the employment of additional personnel in the community in the future, they love it even more.

The feds just secured the loan amount for MELF (micro-enterprise-loan-fund) in rural counties be matched at a .5 on the dollar! So if I applied for $25,000 right now, was able to show the potential for employment of others in the future, and the overall business plan was acceptable to the COC. loan committee, I would potentially be paying back $12,500.00 at a 5.25% rate over 5 years, for $25,000.00 in operating capitol. That seems very equitable to me. Remember, the chambers of commerce typically operate outside municipalities (city limits), so this is of primary interest to rural entrepreneurs that can see an extremely reasonable $25,000 loan and interest rate turned into a 12,500.00 payback if one stays in business for at least 3 years (those are the conditions on the grant portion).

Really good starting place if you meet the parameters, and if $25,000.00 is enough to think about for starters. However, automating a cabinet shop could run into the 6 figures, so this may not be the ticket for you. At least worth an inquiry.



To illustrate the above, I started a shop that bought a new molder and grinder and a used ripsaw to make moldings at the start of the poplar molding market in 1985. Once we got running, we averaged 6500 l/f a day, every day for the 5 years I ran the shop. Our net profit from the molder operation was $.05 per l/f. That comes out to $78,000 per year - over and above all our costs and whole company profit! Not including the custom runs where the nickel a foot turned into $.15 per l/f.

That molder paid for itself in 4 months, then started paying for everything else. That money bought us three shapers, 2 joiners, a 48" widebelt, a planer, gang rip, 2 head planer, door hanging equipment and more. Admittedly an extreme example, but that is the way it works.

Find a capable CPA you can talk to, and who will only bill you for the time you use, and work with him/her to project the future and how equipment will be paid for and help you attain your goals.



From the original questioner:
I appreciate all of the advice. I don't want to go broke in the process, but I am extremely ready to grow my business. I have been doing cabinet work for 14 years off and on and am ready to turn this business venture into a profitable business. I am ready to get the equipment and workers to make it happen. I would also be interested in hearing from those of you that have done well in the cabinet and millwork business. What steps did you take?


If you cannot get the equipment paid off in 5 years, don't do it. There is a common myth that more machinery will make you faster and more profitable. Not true. You would be surprised to see how smaller shops with little equipment crank this stuff out and put money in their pockets. It is possible. What makes these guys successful? They made due with what they have. Find a market that you can thrive in now, with what you have. It may not be what you want to do, or who you want to work with, but view this as a stepping stone.

So much of a good cabinet shop is the process and the way you deal with customers. You may want to be semi-custom, where you limit your sizes and cut down on opportunities for mistakes. It is easier to remake a filler than it is to remake a cabinet. And how are you handling your mistakes or missed deadlines? Are you throwing stuff in for free as a goodwill gesture? Don't! This is more work for you and less money, and it kills your deadlines. This is a common mistake.

Take a look at your practices. What can you do to be more profitable? Can you outsource the finish work, the doors, the drawers, the components? Take a look at how much time it takes you to make/do these things. If someone can do them to your satisfaction cheaper, why not? It's like hiring someone else and you don't have to pay them when you don't need them. And they are the ones that have to pay for the equipment.

Do you do tile, electrical, plumbing, just to help the customers out, so you can get paid faster? That can be a financial trap, too. Stick with what you are good at. It is okay not to be Superman and have to do it all. Referring to other contractors can be a source of referrals for you, too.

What are your competitors doing? I've got guys selling to builders at $60 l/f, uppers and lowers. They don't put back on the bases. They use 5/8 pb, and they just nail their carcasses together. No glue, no screws, just 15 gauge nails. No dados, and a fixed shelf. Other guys take other shortcuts. How are they doing it faster and cheaper than you are? You need to know this.

Again, more equipment is not always the solution. It works best when you have tried everything else. If you think you are not making money now, wait until you have huge payments. You've got to have a good business foundation in place first. Until you do, you will be contributing to someone else's good fortune. They will be buying your equipment for pennies on the dollar when you cannot make the payments.



Investing in more productive equipment will always pay for itself, if it is used enough. But you don't just wake up on the first day after installation, needing all that production capability. It's kind of like adding another position. You need one more guy but don't really need a full timer. Unfortunately, they don't sell part time machines. In other words, there is a ramping up period. You will be amazed at how short a time period that will be, once you get the machines.

Last year we replaced our beam saw and added a vacuum former. We leased these, as I have with other machines. I knew I needed to sell the old beam saw, so my lease is structured to give me payments about $1000/mo less for 6 months, then about $100/mo more for the balance of 5 year term. This feature allowed me to continue making payments on both until I sold the old one. I never did sell the old one, incidentally, and now my production manager wants me to keep it. Our business has doubled in 8 months. The old one will be paid for in about 3 more months. We have survived what was a pretty daunting task at the time, that left me leveraged heavily (we put in a point to point at around the same time as the first beam saw). We did a 90 day deferred payment on those early machines. Costs a little more, but the ramp up time was again important.

Lease qualifying is very easy. Seems you can get approved if you have a pulse! Leasing, I think, is a little more expensive in the long haul, but if you let the production enhancement pay for it, it really is not a big factor. Banks only want to loan to companies that don't really need the money. The question is: will the sales grow as a result of your added capacity? The previous post with the moulder is a very typical scenario, in reality.



In the last 18 months, we have put in about 200K worth of new equipment. Previously, we outsourced a fair amount of our production, and I was able to pay for some of our equipment from the sale of paid for inventory that we were able to eliminate.

We just put in a new Biesse PTP machine. We had a couple of parts that required stops at 2 different machines to complete. When we did a time study comparing the old method and the new PTP, I was a little bummed that it wasn't much faster. Then, after the installation we realized that it was a huge increase in productivity in that the old method had to be handled for the whole process, whereas with the PTP, a part can be placed on it and work started. While that part is being run, other tasks can be handled.

The most important advice, though, is to buy what you need, not what the salesman is selling! I still get guys that come into my shop and tell me what a mistake it was to buy a PTP instead of a router. (For you sales guys, find out my business before you tell me what I need.) For my product and what we needed it to do, a nested base router was out of the question, but that is what everyone wants to sell me. Don't buy something that "will do" - buy what you need and a little more, so that you have room to grow with it. I spent extra on a bander that does 3mil and corner rounding, that we never use, but it runs at twice the speed as other banders in its class, well worth the extra 10 grand to me.



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