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5 + 1 way your machines will help you get funding

27th November 2022 by P. Merker

Managing investments, securing liquidity – even in “normal” times, it is a challenge for every entrepreneur to solidly finance his current expenses and machinery.

Even though one may wonder when there have ever been “normal” times, many additional hurdles are piling up right now in front of the medium-sized company that wants to keep its finances in order.

Inflation is driving up prices and unsettling buyers and customers, interest rates are rising, and future energy costs are almost impossible to calculate. Even for companies that can easily pass on increased costs, liquidity is getting tighter. This is due, for example, to the fact that sales tax – which has to be financed in advance – is rising along with prices. And banks are being more stingy than ever with credit lines – instead of expanding them, they are more likely to cut them.

Currently, 24.3 percent of businesses currently negotiating their credit needs report significant reluctance on the part of banks – the highest figure since 2017, according to a survey by the Munich-based Ifo Institute.

Lack of or insufficient collateral is often one of the biggest obstacles to credit:

In a business survey conducted by the DIHK in the summer of 2021, for example, one-fifth of medium-sized companies (20-199 employees) said that collateral was the biggest challenge in obtaining debt financing.

Many of our customers confirm this: the banker waves off the idea or raises his hands helplessly when the machinery is offered as collateral. In many cases, this is simply because the banks lack the know-how and the intellectual access to the equipment. As grandfather used to say: “Wat de Buer nich kennt, dat frett he nich …” (What the farmer doesn’t know, he won’t eat).

This is all the more astonishing given that machinery financing still accounts for the lion’s share of investment financing.

Source: Statista on the basis of Bankenfachverband, own presentation

Time to show the promised paths:

The modified classic: bank financing with machine valuation

Oldie but Goldie: Sale and lease back

Goldie II: Hire-purchase, financing purchase or sale & buy back

Goldie III: Asset based finance

The modern way: Pay-per-use

Bonus path: subsidies

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1. The modified classic: bank financing with machine valuation.

Works more often than you think: If your company has machinery and equipment, obtain a current asset valuation. This helps in the first step to

Document the assets of your company
Adjust the book values in your balance sheet to realistic market values.

With a machinery valuation, you provide evidence of the existing assets in your business.

If you have already taken out loans and credit, the bank can use the information documented in the appraisal to determine how much equity you may (or may not) have already accumulated.

Furthermore – and this is the core – the valuation contains estimates of the fair value of the machinery and equipment.

These provide a much more accurate picture of the financial health of your business than pre-determined depreciation schedules.

Suitably qualified machinery and equipment valuation experts are recognized as credible service providers by most lending institutions as impartial third parties who have no interest in their own transactions.

But careful! Talk to your bank beforehand, because they only accept appraisals that they have commissioned themselves!

At the same time, the expert opinion can determine the sum insured for the machinery and equipment to be financed, so that you are adequately insured. Incidentally, this is also important for the financing credit institutions, which have to make sure that they are covered in the event of a loss (Basel III).

Improve conditions

You may get better conditions (interest rates, repayment terms) if you can prove the value of your machinery.

The value of your machinery often also depends on the condition it is in at the time of valuation. Has the equipment been regularly maintained and repaired? If so, they will have a longer life and a higher value.

An appraiser can estimate the expected useful life of your equipment.

If you own a machine that is expected to be economically useful for another 20 years, but the bank has only offered you a 5-year term so far, documenting the expected life could allow the bank to extend the repayment period.

2. Oldie but goldie: Sale and lease back

When purchasing new fixed assets, you will almost certainly want to consider whether leasing is a worthwhile option. But you can also sell mobile fixed assets already in use to a leasing company and lease them back directly for further use.

3. Goldie II: Hire purchase, financing purchase or sale and buy back

In the case of installment plan, the company remains the economic owner of the machines and retains them in the balance sheet. Legal ownership passes to the financing company and reverts to the company upon payment of the final installment. This is the reason for the similarity to a classic financing purchase.

4. Goldie III: Asset Based Finance

Short-term loans secured solely by machinery and/or inventory are often the specialty of alternative finance providers and an interesting alternative to bank loans.

What these three financing methods (Goldie I to Goldie III) have in common is that, firstly, the focus is not on creditworthiness but on the company’s assets. Secondly, the fair values are lent on, not the book values.

An example:

Imagine a machine park that originally cost 20 million euros to purchase. The book value is now 5 million euros and the bank might accept 10% to 30% as collateral (i.e. a measly 1.5 million euros). On the other hand, a financier specializing in assets could accept the market value of the machines, e.g. 10 million euros, with 50% to 60% as collateral, i.e. 5 to 6 million euros.

At this point we may again charmingly bring our services into play. Because:

Before such a financing alternative can be considered, the machinery and assets must often first be released from other obligations. Often, existing loans have to be restructured and collateral has to be released by the banks.

To this end, we have often valued machinery and assets, enabling banks to reduce both loans and collateral to a noticeable extent and paving the way for financing alternatives. Contact us!

5. The modern way – Pay per use

Although we cannot (yet) make a decisive contribution to this modern form of financing, we find it so exciting and promising that it should not be missed.

The idea is impressively simple: The manufacturer provides the customer with a machine – payment is only made for actual use. Use can be charged according to time (“pay-per-hour”), per manufactured part (“pay-per-part”), and it is not unusual to combine this with a basic fee.

The first advantage is obvious, because as a company you save high initial investment.

In uncertain times, this model can be particularly interesting, because it is not possible to estimate how future capacity utilization will develop.

For manufacturers, this may open up completely new customer groups and the possibility of using a machine consecutively for several customers instead of selling it only once.

This modern form of financing is made possible by digitalisation, because a great deal of usage data has to be exchanged between the manufacturer, the customer and any third parties involved.

There are actually hardly any limits to the concrete form of the contracts. Financing partners can be involved who assume part of the risks and in return receive a financial share. Down payments, buy-back obligations, bonuses, services, etc. can be agreed – depending on the requirements and wishes of the parties involved.

An interesting variant is offered by some banks, namely in such a way that the amount of repayments is linked to utilization. This allows finer liquidity management.

bonus path: Subsidies

The funding jungle in Germany (or anywhere else) is dense, but not impenetrable.

We know this because we have been asked to evaluate prototypes a few times recently. The aim was to obtain funding for development to production maturity.

We’d like to do that more often, because it’s an incredibly exciting task. On the other hand, no grant funding should fail because it is not possible to prove the value of the machines and prototypes to be funded to the granting agencies. So, give us a call!