Maximizing your investment: Business Development Bank of Canada recommends long-term planning

If you’re buying equipment as a quick fix for a rapidly growing business then there may be a better way to make the most of your investment without draining the company’s cash.

“That equipment purchase can be a costly decision. Entrepreneurs need to anticipate growth and do some long-range planning first,” says Mary Gagliardi, Business Development Bank of Canada (BDC) Vice President and District Manager, Southern Ontario. Gagliardi has seen many companies unexpectedly pick up new contracts and buy new equipment without carefully assessing their needs. “In capital-intensive sectors such as manufacturing, if you have an unusual blip in production, you need to know whether that’s just temporary and how new equipment will serve your business.”

Gagliardi recommends that business owners purchase equipment with a long-term plan in mind. BDC Consulting can help companies assess their overall business needs and devise a sound production strategy by implementing a step-by-step plan that might involve a plant overhaul or redesign. “Entrepreneurs wouldn’t necessarily have to tackle an entire production line but focus on improving one area of their business,” she says. “Ultimately, you could reduce storage space, decrease inventory, improve turnaround time, and use those cost savings for an additional investment in equipment,” she adds.

Strategic alliances can also benefit companies that want to share knowledge and skills. “Small businesses could consider sharing basic office equipment and telecommunications technology if it doesn’t adversely affect productivity. It’s just a question of being innovative with your resources,” says Gagliardi. For example, a company could schedule the use of machinery to accommodate other users, so that a few companies are footing the bill.

In the manufacturing sector equipment can have a long shelf life or be upgraded to meet current needs. Nevertheless, entrepreneurs should check out their purchases thoroughly before buying them. “The first question you have to ask is why is it up for sale in the first place? You may be dealing with a seller who is just getting rid of outdated equipment,” says Gagliardi.  “If the reason for selling is a lost contract then it makes sense to take advantage of the opportunity. But put caution on your side first.”

One of the most obvious routes is to check out industry associations and trade shows to track new trends. “Many questions can be answered by simply going online and finding out what other people are doing in your field,” Gagliardi  says. An innovative way to gain insight into what your competitors are doing is to get in touch with your suppliers and find out what the competition is using.  

Buying, leasing, and renting equipment each have their own advantages. Gagliardi recommends that entrepreneurs first consult an accountant before making a decision: “There are complex tax issues to consider, so get an expert opinion.” With an operating lease, the lessee acquires the equipment for only a portion of its useful life. On the other hand, a capital lease is classified as a purchase by the lessee. There are many reasons why a capital lease could be considered a purchase. For example, the lease term is greater than the lifespan of the equipment. Or, the equipment would have depreciated by the time the lease has expired and the property is transferred to the owner.

When purchasing equipment entrepreneurs need to consider additional costs such as delivery, installation, employee training and downtime. According to Gagliardi, “Entrepreneurs have to be able to address all expenses without draining the cash flow.”

BDC’s flexible financing allows clients to purchase new or used equipment that will increase their productivity and sharpen their competitive edge. The percentage of the total cost financed is based on the company’s repayment ability. “When you sit down with BDC, you can work out a flexible payment plan that meets your needs and protects your cash flow. In some cases manufacturers can obtain up to 25 per cent in additional financing for costs related to installing and assembling the equipment, training employees and related consulting services,” she says.

Previously published in the January/February 2008 issue of Advanced Manufacturing.