Wise Financing for a CNC Machine Shop

CNC machine shop financing is one of the financial pitfalls for a machine shop may be that the owner is a machinist first. Most entrepreneurs in a variety of specialties discover this pitfall when establishing their own business. A wise approach is to remain in our area of expertise and rely on the support of others for business support with advertising, personnel, sales, and finance. Whether a business has a few employees, or a few hundred, wise financing for a CNC machine shop can make the difference between success or failure.

Expansion

The lure of buying shiny new equipment is a challenge for all businesses. We recommend taking full stock of everything you have before you buy more. Often equipment can perform added operations with some new skills training and maybe a jig or added part. And often productivity can be increased with a full workflow review. If new equipment is still needed for added production cash is an option that is so much more beneficial than years of debt.
Buying new equipment with the hope of a new contract is a huge risk, especially if it is not a cash purchase. A contract in hand makes it much easier to sleep at night when an investment is made.

When buying new equipment does make sense if you are currently outsourcing parts in large volumes. The purchase of a new machine will control quality, delivery time, and, even with a loan, probably result in a lower monthly cost than the cost of outsourcing.
Adding technology is also a worthwhile endeavour for expansion when costs can be kept down to increase productivity and customer service. The fierce competition in machining makes every penny count.

The Boom

There are definitely times when business is hopping. You feel you could write a book on running a successful machine shop. But this is the time when It’s easy to lose focus on the small things that affect productivity. And it is easier to assume this is the normal flow for your business. Thinking this way means you won’t set aside profits for the leaner times. And it means you won’t apply lean manufacturing principles to continue to improve. This is the best time to set aside cash for future purchases also.

Unique Value

Business booms, or worse, downturns in business may tempt you to extend credit to customers. In a boom, this may be easier to absorb into your cash flow, but production always comes at a cost. Your finances need to be very fluid to allow months between payout and payback. In lean times it may seem like a sales tactic to secure new business. Your cash flow at this point won’t be able to bridge that financial gap and you may end up needing a loan resulting in even further losses.
Competing for business with extended credit terms or the lowest price is never a winning proposition. Someone will always be able to do it for less. Your business needs to be built on quality and customer satisfaction with a unique value proposition. Understand what you do best and charge appropriately for the quality you provide. Customers will appreciate service, quality, and reliability above all else.

Isolation

Aligning yourself with any singular source puts your business at great financial risk. The recent supply chain interruptions due to the global pandemic are one such example. Considering a variety of sources for parts can help alleviate supply chain problems. Local geography is another consideration. Keeping things local can help with overseas shipping problems or even border crossings, but a natural disaster in a localized area can also paralyze your business. Be strategic in partnerships affected by geography.
And this same isolated approach can be just as detrimental when it comes to your clients. If your business relies too heavily on one customer, any number of factors from a change in product design to bankruptcy could stop your production in an instant. Consistent production planning from one main client should be balanced with a variety of smaller contracts to provide that safety net, as well as the ability to grow with other client businesses too.

Manufacture-Focused Lender

When it does come time to finance a startup, an expansion, or even that new piece of equipment you need to fulfill a big order, it’s important to work with someone who understands your business. Many loans require a large deposit upfront and monthly payments with accrued interest starting in thirty days.
Balloon payments or lease-to-own options may look appealing with limited cash flow but be sure to read the fine print to establish that it is the right deal for you. Large deposits are still often needed upfront and, though either option may alleviate higher loan payments in the early years when cash flow is needed, they can bottleneck that flow when larger payments need to be made on the backend of the loan.
Innovative approaches to financing are available that recognize the need for cash flow to continue to build stability. No money down, or deferred money down for 30 days offers machine shops the chance to get paid for business before they have to start repaying the loan.
Relationships are always key with clients, suppliers, and lenders. Wise financing for a CNC machine shop is more than just money. These approaches to finance with strategic partners are the collaborative expertise of the machinist and the financial controller of a machine shop with vision and planning. Working together with all your partners is much easier when you can share that strategic plan.