Equipment financing: How Does It Work?
‘Finding money also requires innovation and combining different instruments.’
With long-term financing products such as leasing, renting, or loans, banks will scrutinize your financial statements; they will analyze the reasons, costs, and benefits associated with equipment purchase, along with your business’s time in operation, credit level, country risk…
You have other ways to finance your purchases, such as documentary credits payable over time, promissory notes, and other products depending on the specificity of each country’s regulations.
Your Financial Manager will analyze your case and advise you on available options based on your needs, capabilities, and location.
MachinePoint offers machinery appraisals:
MachinePoint’s valuation services can provide an independent appraisal to:
- Lessors (banks or leasing companies) who want to calculate the Residual Value of the machine at the end of the financing period based on a technical audit.
- Auditors who want to calculate the Fair Market Value of the machine based on the expertise or knowledge of a specialist.
When machines are valued, various aspects are considered:
- Type of machine and brand quality
- Current market situation and expected evolution of the competitive environment in the market
- Margins projections based on historical (real) data
- Future location of the machine
- Trends in mergers and acquisitions in the market for this type of machinery
- Financial situation of the manufacturer
- Recent mergers or bankruptcies of machinery manufacturers
Industrial Financing Products
Short-term financing (up to 2 years)
- Documentary credit with deferred payment: a letter of credit requiring payment up to two years after the machine is delivered, once the negotiated documents are presented.
- Promissory note payable in 1 or 2 years with the presentation of bank guarantees: a negotiable instrument containing a written promise to repay the amount up to two years after the machine is shipped, through an agreed series of partial payments.
Medium-term financing (3 to 7 years)
- Financial lease (leasing): the buyer will lease the machine with the option to purchase it at the end of the financing period for a reduced fee (usually a single monthly payment). Suitable for buyers who intend to retain ownership of the machine at the end of the financing period.
- Operating lease (renting): the buyer will lease the machine, receive maintenance services, and typically pay lower monthly installments, but the machine will have a higher residual value at the end of the financing period. Suitable for new machines in more dynamic markets.
Promissory note
Requirements:
- It would be preferable for your local bank (the issuer of the promissory note) to have a Standard & Poor’s rating of at least BBB+, or at least have cooperation agreements with our banks.
- Depending on assets and financial statements, your local bank may ask you to provide some of your assets as collateral (from 0% to 100% of the total amount).
Advantages:
- The cost of issuing these instruments is lower than issuing a documentary credit, but the risks for the seller are higher.
- The process of issuing the promissory note should not take more than 2 weeks (this varies depending on the country, as Central Banks in some countries require more administrative procedures).
- The financing costs of the operation could be lower than those provided by your local bank, as interest rates in the European Union are likely to be lower than in your own country.
Leasing of Industrial Equipment
Requirements:
- For financing projects from €100,000 to €5 million.
- Not available in all countries.
- Credit risk departments will assess the feasibility of the operation once the most recent financial statements of the company are presented.
- Financial statements should typically include audited financial statements for the last 3 years (balance sheet and income statement), provisional financial statements (financial report for the last months), rationale and benefits associated with the equipment purchase, proposed transaction structure, and invoices from the exporter’s equipment.
Advantages:
- The machine can be financed up to 100%.
- Suitable for buyers interested in retaining ownership of the machine at the credit’s maturity.
Renting of Industrial Equipment
Requirements:
- For financing projects from €100,000 to €5 million.
- Not available in all countries.
- Credit risk departments will assess the feasibility of the operation once the most recent financial statements of the company are presented.
- Financial statements should typically include audited financial statements for the last 3 years (balance sheet and income statement), provisional financial statements (financial report for the last months), rationale and benefits associated with the equipment purchase, proposed transaction structure, and invoices from the exporter’s equipment.
Advantages:
- Typically includes maintenance services plus an insurance policy.
- Suitable for newer machines in rapidly changing markets.
- Expenses are usually deductible.
- Monthly installments are not accounted for as an expense, allowing for additional liquidity.
Credit Line
Requirements:
- For projects starting from €1 million. Slower approval process (the final decision may take up to 3 months).
- Maximum financing is 85% of the machine.
- Most of the equipment should be new.
Advantages:
- The Export Credit Agency usually grants very favorable financial conditions.
- Official public support provides a guarantee to commercial banks.
