Financing Expansion Cost-Effectively, While Adapting to Technology Shifts

Advances in Smart technologies and automated equipment, along with booming U.S. automotive sales, are transforming the metalcasting industry at a rapid pace. While these developments offer foundries and diecasters strong opportunities for growth, it also presents new challenges to navigate.

Smart technologies can contribute to smoother, leaner operations, which will save money for manufacturers. However, as equipment design and performance evolves, how can metalcasting businesses afford to stay competitive when they must continually invest in equipment that is likely to become obsolete within a few years? 

Driving (and automating) change — Nearly every step of the metalcasting process now can be automated thanks to the progress of Smart technologies, from mold pouring to cleaning, to finishing and inspection. This progression has exponentially increased levels of productivity, allowing for more affordable production of castings on a larger scale, which means a higher capacity for growth.

Metalcasting companies can grow and streamline their operations by adopting the latest in advanced equipment. However, this strategy also raises the stakes on their financial stability. Those that stay on the pulse of the latest breakthroughs and upgrade as new technologies become available will gain a competitive edge, but they may find themselves facing hefty bills that threaten profitability.

Investing in upgraded technologies is crucial. The ‘old’ ways just won’t cut it anymore. However, the costs of new machinery, as well as the Cloud-based software that allows machines to communicate with each other, can be daunting.

Adding to the cost concern is the fact that, even when purchasing the most efficient and up-to-date equipment currently available, there is a risk that it will become obsolete quickly. The good news is these assets can be financed at attractive rates that leave no obligation to purchase.

Finding the right structure — There are a variety of financing structures that can save metalcasting companies upfront costs as they shift to automated equipment – and continue to upgrade to the latest and greatest.

We can cite examples of foundries that reduced costs from $30,000 per month down to $20,000 per month after upgrading to automated equipment, due to a decrease in labor expenses. They were able to do so on capital leases, which allowed them to purchase the asset over several years on a payment plan, spreading out the cost.

Having noted this, it’s important to add that, for many assets, capital leases do not make as much sense as they did in the past.  Why?  Because there are fewer instances where it is cost-effective to own equipment outright.

With the rapid advancements in technology, foundries that purchase equipment outright risk being stuck with outdated equipment, which reduces their financial flexibility and thus their ability to be competitive.  Because of this, many manufacturers are switching to an operating lease, which offers a lower monthly payment than a capital lease and the ability to hand the equipment back at the end of the term, with no obligation to own the machinery.

In this case, the aforementioned foundries that financed automated equipment could reduce their payment even further from $20,000 per month down to $15,000 per month with an operating lease.  Additionally, when the term is over, they would have the option to either purchase the equipment or hand it back at no charge and instead upgrade to a newer asset.

Financing that fits your contracts — Rapid technology advances have created new ways to keep up with some of the largest industries that foundries service. One major example is the U.S. automotive industry, which is surpassing expectations and setting new peaks in output and revenues. In fact, 2015 and 2016 were two of the highest years on record for automotive sales in the country.

With these advantages come welcome opportunities for growth, but also an increasing risk of equipment obsolescence and dependence on a fluctuating industry. Knowing this, companies that prepare themselves by acquiring equipment in smart, forward-thinking ways will thrive and protect themselves.

Manufacturers that find themselves in need of the latest equipment – and more equipment – to adapt to increasing demand from automotive companies and new contracts can maximize their profits from this growth by partnering with finance companies that offer structures tailored to their industry.

For example, automotive company contracts often cover a five-year term with an option to renew. Metalcasting businesses preparing to work on a contract like this will benefit from finance structures that provide the borrower with an out after the first five years, just in case their contract isn’t renewed.

If the contract is renewed, the metalcaster can work with the finance company to continue to lease the equipment, or purchase it on an affordable plan over the next few years when it makes sense. 

Another alternative to consider is an operating lease with a fixed-buyout option to purchase. This structure avoids the uncertainty of Fair Market Value (FMV) leases, which make the borrower responsible for paying whatever the market value of the asset may be when the term ends. With FMV structures, a metalcaster could be stuck with a much larger bill than anticipated. 

Instead, an operating lease with a built-in fixed-buyout gives foundries an up-front understanding of what the total cost will be, and allows them to defer the ownership decision until the end of the term, when they can assess their workflow and equipment needs better.

The metalcasting industry is changing on the influence of automated processes and prospering on the growth of manufacturing. By finding the right financing structures for equipment, foundries can seamlessly handle the increase in business and keep up with advances in technology.  
Eric Freeman is president of Liberty Commercial Finance, a boutique finance company with roots in the industry that provides customized financing to companies throughout the U.S.  Contact him at [email protected].