Companies sometimes decide to make large capital purchase to increase efficiency, production capacity or even to reduce the environmental impact of their operations.
The above and many other objectives are all excellent reasons to begin the process of exploring purchasing new equipment, machinery or industrial tools (whether its new impregnation technology, plastic moulding injection machines or any other types of equipment). Capital purchases of this size represent massive opportunity but also an enormous risk to any business and not just from a financial perspective.
Once you’ve decided to go ahead, the question becomes what the critical questions that should be carefully considered and answered before the purchase commences are.
Is the business case for purchasing strong enough?
It’s a simple question, but many businesses fail to provide persuasive enough reasoning for purchasing new equipment or machinery. Before making a purchase of this size, it’s critical to make sure that it makes sense, you can do this by starting to answer questions like:
- Will this new equipment lead to performance gains? If so, beyond improved efficiency, how will this translate into time saved, costs cut, or further profits gained?
- Does a purchase of this size leave your business financially exposed and has that risk been quantified? Furthermore, if the business didn’t continue as normal tomorrow and for the next six months, would this purchase leave you without working capital?
- Can a similar level of efficiency/gains be achieved by upgrading your existing machinery or equipment? Alternatively, could the equipment you want to be purchased 2nd hand and still achieve the same benefits at a lower cost point? (albeit with a shorter useful asset life)
- Will the proposed equipment deliver on the specs/benefits promoted? Beware over the top marketing and check reviews from users of the equipment. If you can find some previous customers, contact them for feedback.
Whether the questions above or more specific ones related to your business, the point here is to robustly attack the business case for buying new equipment, in the process making sure the purchase decision makes sense. Additionally, an outside perspective is also valuable to get regarding the purchase (an unbiased opinion from an expert with experience is a valuable one).
How will the equipment/machinery purchase be financed?
Of course, you could just purchase the equipment outright, but when dealing with a large capital purchases, it’s worth assessing the options. It may be that other forms of business finance can offer benefits over an outright purchase, for example, there are a few different ways you could finance such as a purchase (or even lease):
- Outright purchase comes with the least admin, but it also means you end up spending a large amount of capital upfront. Apart from depleting your finances, you also become responsible for any general maintenance regarding the machinery/equipment straight away (unless otherwise agreed).
- You could procure the equipment using asset finance. This could be done by getting an asset finance company to purchase the equipment on your behalf and then agree to either lease the equipment to your business for its usable life or opt for a higher purchase option, meaning at the end of the hire period you own the equipment outright (both will charge interest/fees). The main benefit of this type of finance can spread the cost over the usable life of the machinery/equipment, and under most lease agreements you won’t be responsible for general maintenance costs (depending on the deal you’ve made).
- You could also take out a standard business or commercial loan to fund the purchase, enabling you to buy the equipment outright but meaning you have an obligation to the commercial bank or another lender to pay back the sum over an agreed period with terms. The advantage of this is its generally a quicker form of finance to setup, and if you have a longstanding relationship with your bank, you should be able to negotiate a good deal.
Overall, choosing to finance or purchasing outright depends heavily on your business circumstances.
How long does the warranty last?
When purchasing complicated equipment or machinery, one thing you can guarantee is no matter how well built at some point; something will go wrong and need fixing. These kinds of problems shouldn’t occur early on or even into the midlife of use, but they do happen. In these cases, whoever foots the repair bill will depend on how long your warranty lasts and what it covers. So it’s essential when purchasing this type of capital equipment to check the warranty period and conditions carefully.
Is there an installation cost?
Is there a cost to installation and if so is that covered by your business as part of a services contract you have with the manufacturer/supplier? Alternatively, is it covered by the manufacturer/supplier or is an expectation on you to hire a third party to install the equipment?
Whatever the situation is essential to understand when you make the equipment/machinery purchase if the installation is included and what are the exact details that are covered under the installation agreement.
Have you shopped around?
Often businesses will get very stuck on particular brands or supplier when making these types of purchases although this speaks to trust in a brand or supplier, it’s usually not the best option to just rely on a single supplier/brand. To get the best price, you need to shop around and look at different brands and suppliers. You can then compile all this information to figure out what’s the best purchase for your business (and even use the market information to negotiate a better price with a current/preferred supplier).
Will there be training?
Does the purchase include training on utilising and maintaining the equipment from an expert technician? If so, then how much time is provided, how many employees can be trained, and what are the expectations for ongoing support (training is very much an ongoing process in many cases). Bear in mind that, many suppliers and manufacturers don’t provide training without a further service contract covering this cost.
Equipment & machinery purchases can be complicated
Often when the decision has been made to make such a large capital purchase, colleagues will be filled with excitement and everyone will want to get going. This is the point at which you should take a step back and consider all the questions above and many more that will be specific to your business/industry.
Yes, you want to be time efficient in the purchase process, but you also want to take your time to way up the options and make the best purchase decision for your business.