Thanks to the new tax bill, we’re going to see an awful lot of changes to the dynamics of U.S. machinery loans and how companies can benefit from them. For one thing, you can now depreciate your capital purchase in the first year. Instead of writing off your new hydraulic press or CNC router over say, 10 years, you can write it all off in the first year — which reduces your earnings, which reduces your taxes.
When I was the president and COO of Robroy Industries, we always tried to expense everything and write off as much as we could when it came to adding new machinery, updating a plant or factory, and making improvements to our manufacturing processes.
Now with machinery loans, the process might get even easier.
Who needs a machinery loan?
Basically, any business that needs an expensive machine in order to operate is going to need a machinery loan. These don’t necessarily mean computers and printers, since that’s often considered office equipment.
Here are a few examples of likely candidates for machinery loans:
- Tool-and-die companies that need a metal lathe or a die cutter.
- Small parts manufacturers who require an industrial 3D printer.
- Contractors who need a skid steer loader.
- Sign companies that require a CNC router or wide-format printer.
Or maybe you need to replace or update old equipment. When I started working at Robroy, there was a lot of equipment that needed updating, including an entire manufacturing plant that we needed to convert to a near-automated facility. This was a multi-year operation that took a lot of planning and working closely with our financing partners in order to be able to complete everything on time and within budget.
Loan vs. lease
Now the big question is whether you take out a machinery loan or lease the equipment. If you have a very large project, a capital lease could be a lot smarter than a machinery loan because you can write off the cost of the lease payment every month. Plus you don’t have to own the equipment — the leasing company does.
But if you’re in a state where you pay personal property or inventory tax, leasing might make more sense because you don’t “own” that equipment, so you won’t be taxed on it. So be sure to ask your finance person to do some projections of what your business will do over the next five years (or the life of the equipment) to determine the smarter way to go.
On the other hand, if you want to write off the entire cost of a piece of capital equipment, a loan is a lot smarter because you get the tax write off in the first year. In the end, the bigger the asset, the more likely you’ll go with a lease. But, once again, that might change with the new tax laws and what your finance person says.
Where to find a machinery loan
There are a few places you can find a machinery loan, depending on how much you need.
Walk into your local bank and ask them. Banks do have money to loan, but you need to make sure you have good credit, and you want to have a good relationship with the bank. In rural areas, the small local banks are pretty active and willing to work with small local businesses. But in large city centers, big banks like Wells Fargo are very active in machinery loans and leases. I did an awful lot of capital leases with Wells Fargo.
A smaller version of banks, credit unions are often a little more willing to take risks and work with small local businesses, although they might not have the capital for multi-million dollar projects. Some credit unions even have access to Small Business Administration loans (see below).
There area also crowdsourced and peer-to-peer lenders like:
You can also set up a funding campaign on Kickstarter, Indiegogo or GoFundMe, depending on the size and nature of your business. I’ve seen people fund projects by saying, “I have a project and I’m looking to put together $250,000, and I’m willing to give you eight percent return on your money,” and then set the buy-in at $10,000 lots.
Private lenders and equity groups
These lenders work just like tech venture capitalists — since they’re not regular lenders, you’re probably going to pay a little more in interest. On the plus side, they would be more apt to take risks than a regular bank.
Some equipment dealers might offer their own financing, depending on what you need. For example, purchasing or leasing a company car can be done through the car dealer or fleet manager; financing a skid steer loader can sometimes be done through the dealer and the manufacturer.
Government-backed SBA loans
These are loans guaranteed by the Small Business Administration (SBA) and issued by participating lenders, usually banks and credit unions. The SBA can guarantee up to 85 percent of loans of $150,000 or less and 75 percent of loans of more than $150,000.
Finally, if you run a minority-owned, woman-owned or even veteran-owned business, look for special loans and programs available to you.
Getting a machinery loan
In terms of financing a machine, you want to make sure you have a serious discussion with the financial advisor to your business. Because if you can expense the full depreciation in the first year, you won’t necessarily be able to deduct the full amount of the interest you would pay over the life of a machinery loan or lease. So it’s a good idea to have someone run the numbers based on what the set of circumstances really are. Once you know for sure whether you should buy or lease, you’re ready to start talking to a small business loan or lease provider.
Before applying for a machinery loan, there are a few things you need to do first.
Write a business plan
Have a good business plan in place that you can share with lenders. Talk about:
- How you’re going to use the equipment.
- What hole it’s going to fill in your business as well as the marketplace.
- Show how it’s going to improve your bottom line.
This could be through new product sales, reducing damaged and scrapped inventory or even improving product quality.
Put your finances in order
Have your financial records up-to-date, including cash flow statements. If you’ve got strong sales, even if your credit isn’t great, you might still qualify for a traditional loan. There are many software programs to help you do this, including GoDaddy Bookkeeping.
Write or update company resumes
Polish up your personal resume for you and your executives. Banks might want to know how capable your leadership is when they decide the loan.
In closing, I’d like to share two important lessons I’ve learned. First is when it comes to capital expenditure, nearly everyone underestimates the amount of capital they’re going to need by about 25 percent. That is, if they ask for $75,000, their total cost will be closer to $100,000. Make sure you’ve got everything covered so you know exactly what your costs are going to be.
If you try to do a capital project by committee, you will, as I like to say, end up with a five-seat bicycle.
Second, whoever is given the responsibility of the project/upgrade/loan, make sure they are fully committed and intellectually and emotionally engaged in the outcome. You can really only have one chief, and you want them to be fully on the ball. There has to be someone who has direct and absolute accountability, so put them in charge of the entire project and give them decision-making authority (with your final approval, of course).
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.