While buying used manufacturing equipment is a great way to save money compared to the cost of buying new equipment, used equipment can still be a major expense—one that requires financing in order to be able to acquire the right equipment at the right time. Used equipment financing allows manufacturers to put the equipment they need on their shop floor when they need it without having to set aside the entire cost of the machine.

The other option is to lease used equipment, but that carries its own disadvantages. For example, while leasing lacks the up-front cost of a large down payment, you will be making payments on that machine for however long you have it—even if you have already paid more than the actual cost of the equipment.

Before you use machine tool financing for your shop floor, it might help to consider some of the following tips:

1) Consider How Long You’ll Need the Machine Tool

If you’re considering equipment financing for a piece of used equipment, it’s important to begin by asking yourself one question: “How long will I need or use this machine tool?”

If the tool is only going to be used for a single production run lasting less than a year or two, then it obviously wouldn’t be worth undergoing used equipment financing. In such cases, it may be better to either lease the equipment or to shop out the work to another manufacturer that already has the right tools.

If the tool is going to be a long-term part of your shop floor, then engaging in used equipment financing may be well worth the cost. A financing agreement puts a hard cap on the total cost of the machine over time (assuming all payments are made in a timely manner) and helps to ensure eventual ownership of the asset.

2) Verify That the Used Equipment Being Financed Has No Liens/Liabilities

In any used equipment transaction, it’s important to verify that there are no liens or other outstanding obligations left on the equipment prior to making the purchase. Used equipment liens are a common hazard in private party sales, where there may not be any independent used equipment appraiser to perform basic inspections of the machine and its documentation.

If a lien is left on a machine when you sign the used heavy equipment financing agreement, you may find your equipment repossessed through no fault of your own. It’s important to have these kinds of obstacles cleared prior to signing for a machine tool financing agreement.

3) Consider Using Like-Kind Exchanges to Help Cover Your Down Payment

If you’re considering financing a piece of equipment to replace an older, more obsolete machine tool, it may be worth your while to perform a like-kind exchange (LKE). Using an LKE offers a few key benefits for financing used manufacturing equipment, such as:

  • Helping to Cover the Cost of the Down Payment. The value of the machine tool you are replacing can help to cover a portion of the down payment for the “new” used tool. In some cases, this may be enough to cover the majority of the cost of the equipment being financed. This helps to minimize the impact of used equipment financing on your cash flow.

  • Clearing Room on the Shop Floor. By selling old or obsolete equipment, you can clear space on your shop floor for the new equipment that you’re financing. This helps to avoid—or at least delay—the issue of having to expand your shop floor or add additional capacity to your machine shop’s power grid.

  • Minimizing Tax Burdens for Selling Old Equipment. If a piece of equipment has fully depreciated, selling it can incur a tax burden—cutting into the profits from the sale. For example, if you sold a machine tool for $100,000 at a tax rate of 30%, you would have to pay $30,000 on the capital gain from that sale. However, by taking advantage of an LKE, you could invest those proceeds into the “new” equipment, avoiding the tax loss while improving your machine shop’s overall capabilities.

Of course, the overall impact of an LKE on the overall cost for used equipment financing may vary from one case to the next. So, it’s important to consult with your business’ accountant or tax advisor prior to filing a like-kind exchange.

4) Be Sure to Know Exactly What Your Equipment Financing Rate Is

Here’s a tip that was featured on the Trust Capital USA blog.

Knowing how much your used heavy equipment financing plan will cost you each month is crucial for balancing the books moving forward. Failing to account for the capital expenditure required for the financing plan can be disastrous. However, finance rates can vary from one transaction to the next depending on a number of factors, including:

  • The initial cost of the machine;
  • The size of the down payment;
  • The length of the finance agreement (longer agreements usually mean lower monthly payments but higher total cost); and
  • The interest rate for the loan.

When entering a used equipment financing agreement, it’s important to walk into the agreement with both eyes open (and a plan for making the monthly payments). It also may be prudent to determine whether there is an option to pay off the equipment early, or if such actions would result in a financial penalty. Be sure to get the financier’s pre-payment policy in writing, and to go over it with your accountant or legal representative to ensure you know exactly what it means.

5) Get Someone to Help You Review the Used Equipment Financing Agreement

It is impossible to overstate the importance of having someone help you review the used equipment financing agreement before you sign it. This person could be your accountant, your lawyer, or a trusted and independent third-party used equipment dealer.

The point is to get an experienced and knowledgeable third party who is either on your side or is an impartial observer to review the agreement and point out any potential issues.

Need help finding the right piece of used manufacturing equipment for your machine shop? Contact the experts at SFMS today. We can leverage an extensive network of contacts to help you find the perfect machine for your shop floor—whether you want to finance it or buy it outright.