Leasing is a viable option, even for used equipment

When the market is busy, delivery time for new equipment usually is extended by months for a factory order. During these times, many potential borrowers ask if I can arrange financing for a good used machine tool or a demo model.

The reality is that new machinery is very expensive and significant savings occur if a good used piece of equipment can be sourced as an alternative.

Any leasing company that does business within the manufacturing industry should not have any problems arranging financing for a used machine, and one of the main reasons is that a used machine’s value already has been depreciated.

Based on my previous experience as a seller of new, high-end Japanese equipment, I have always felt a new machine loses between 25 and 30 per cent of its value in the first year. Used equipment buyers need the used machine to be at least this much cheaper to make up for the loss of warranty, installation, and shipping fees, which would normally be included in a new machine purchase.

After that first year, however, the depreciation is minimal for the next four to five years because a good, brand-name machine tool, properly serviced and maintained, holds its value for a very long time.

Exit strategy

When it comes to machine tools, brand-name machine tools have excellent resale value. This is important because a lender’s first concern when financing any asset -- new or used -- is its exit strategy in the event the deal goes bad.

Lenders want the comfort of knowing that the asset can be re-sold quickly with a significant portion of the financing recovered. Leasing companies that concentrate in particular industries have in-house specialists who provide internal evaluations. For example, in the manufacturing industry, they look at a lending transaction, and if the equipment is a quality, brand-name machine tool, they know the true financial exposure is significantly less than the selling price of the equipment.

This makes it a deal that can be easily approved, especially when compared to a traditional lender such as a bank. Many times I have seen a bank reject an application solely because the asset being purchased was used.

Buying used equipment

Although it is important to understand that financing is possible for used equipment, it’s just as important to look at how a seller of a used machine will want to be paid.

It is almost universal within the machine tool industry that every seller will insist on payment in full before shipment. This is because the buyer is normally responsible for the loading, unloading, and shipment of the equipment, all of which, if not arranged with competent individuals, could impact its functionality when installed.

Any reputable seller will arrange a machine inspection, under power, but once it’s completed and the machine has been accepted, the seller will insist on the funds being transferred before the sale is final.

Although this is an industry standard, it can cause problems with the entity providing the financing, particularly if it is a bank, because the financing party is unlikely to provide any money until the machine has been delivered.

There is no doubt I have landed new customers specifically for this reason; we, along with other experienced leasing companies, will pay established used equipment sellers in full before shipment. Now this does not mean a buyer cannot use their chosen financial institution, but it does mean the buyer will have to bridge-finance the deal, essentially providing the seller with the funds required and then getting them back from their funder once the equipment has been delivered.

Importing used equipment

When leasing used equipment that is sourced outside of Canada, customs needs to be considered. Whether the machine is new or used, it will need to be imported into Canada.

Typically, Canadian new machinery sellers take responsibility for the importing, but this will not be the case for an international seller, most commonly a U.S.-based dealer. The relevance here is related to payment of taxes, either GST or HST, depending on what province the machine will be installed in.

When a machine is leased, it is purchased by the leasing company, and that is the entity that pays the taxes. For example, when a $100,000 new machine is leased by an Ontario manufacturer (and the financing approval is for 100 per cent), the seller will invoice the leasing company $100,000 plus HST. The lender then cuts a cheque for $113,000 and pays the seller directly.

Now when that machine is sourced from a seller in the U.S., and to keep it simple it is for that same Ontario manufacturer and for an identical cost (in Canadian dollars), the leasing company will only pay the U.S. seller $100,000 as it will not charge or remit the taxes.

It is only when that machine reaches the Canadian border that Revenue Canada will be looking for the taxes. What this means is that the buyer must arrange for the importation and is then responsible for the tax remittance. However, if the machine is leased, the leasing company can arrange for the importation and pay the taxes too, so ultimately it will be the leasing company that will outlay the entire cost and create a payment schedule.

Financing for used equipment is certainly available, but it is important to understand where it can be found, how this type of transaction is handled particularly from a payment standpoint, and what the implications are when the machine is imported into Canada.