Pressed to Invest: Understanding When, How to Make Invest in Manufacturing Equipment Upgrades

From Tesla and Amazon to Westinghouse and countless other companies across the nation, making investments in manufacturing has become top of mind for America’s business community.

Whether to reduce reliance on international production or merely as a result of growth and expansion, the impetus for financing major undertakings varies. One thing, however, remains a constant – the importance of sound financial planning, especially as businesses across the nation earn record profits as revealed in a recent report by the U.S. Bureau of Economic Analysis.

But before any decisions about improvements are made, leaders need to consider numerous factors to ensure the investments they are undertaking make financial sense over the short and long term.

Pivotal checkpoints on the roadmap include asking:

1. Do you truly need to make changes?
   With how quickly technology and modernization are reshaping how companies do business, it is critical to take an honest look at whether changes really need to take place, and then how significant they need to be to meet the company’s short- and long-term goals.
   
   The current climate is ripe with opportunities as the pandemic revealed many new openings to seize market share, in addition to work-arounds to overcome challenges, which have now become a permanent part of operations.
   
   With that in mind, there’s a big financial difference between upgrading one piece of equipment and retrofitting an entire operation. Bringing in industry experts, weighing your operational abilities against competitors, and consulting equipment finance bankers familiar with your industry can go a long way to determining exactly what changes need to be made. In fact, a skilled equipment finance group can not only provide greater clarity when evaluating options, but also offer deep industry knowledge of current technologies and view all available solutions through an unbiased lens. The ultimate goal is to be a good steward of customers’ financial and operational assets.

2. What will your return on investment look like?
   A solid business plan that gives a 5-, 10- and even 15-year perspective, is at the root of nearly every successful business. Depending on current market share, growth opportunities, as well as challenges provides a window into the viability of making a significant investment in equipment.
   
   There are some industries where a slight upgrade may create more efficiency or reduce costs. Others, especially in areas of healthcare and technology create trickier circumstances. In healthcare specifically, companies need to examine the laws of diminishing returns. For instance, can the costs of upgrading imaging equipment to the latest technology available be justified if doctors and other healthcare providers do not need that level of sophistication to make diagnoses and treatment plans? Will healthcare and insurance providers understand the increased costs or will they take their business elsewhere?

3. How do you right-size financing options?
   Once a decision has been made, the real work begins: building a smart financial solution that will protect the business, while ensuring it has the tools it needs to bring their goods to market. A seasoned equipment finance team can provide options for businesses that take into consideration available capital, cash flow and anticipated earnings. For some, this may include leveraging resources such as loans, government initiatives, low-rate investment incentives and even relationships with original equipment manufacturers (OEMs) to potentially delay or space out payments during equipment installation processes or while functionality is being assessed on site, especially if there are supply chain delays.
   
   Built on strong client-centric relationships, Western Alliance Bank’s Equipment Finance Group takes time to understand a business’ operations and, where opportunities exist, will even take on risk with customers. Taking value, potential resale and other factors into consideration, teams can build customized payment structures to better benefit companies, which makes sharing the risk an appealing option to many businesses.

At the end of the day, upgrading equipment can be a risk – but businesses need to ask themselves if it’s a bigger risk not to make the investment that will allow them to reap bigger rewards in the long term.

Brian Scott is managing director of Western Alliance Bank's Equipment Finance Team. He can be reached at [email protected] or (602) 296-6649.