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First CNC Machine - Buy Outright or Finance

katiebo

Aluminum
Joined
Jan 7, 2006
Location
Illinois
I have a question for all those that started a CNC shop. When you purchased your first new machine how did you go about financing it? Did you save until you could pay cash? Did you put a large percentage down and finance the balance? If you financed the purchase was it through the manufacturer?

The reason I am asking is this. I am planning on starting my shop in the next 12 monthes and am looking at purchasing a Haas Mini Mill 2 as my first machine. The shop will be in my garage to start out. I could buy the machine outright if I had to. However, I would prefer not to bldow so much capital up front. I also like the idea of building a favorable credit history for the new venture.

Thanks in advance for your insight.
 
You pretty much answered you own question. Finance. You want to develop the credit history. Main importance is cash flow. If you blow all your funds on the machine, you will find you need a lot of money later for everything else related to running a business. Financed, the machine will be payments stretched over time. Maybe a few bucks extra for the finance cost and interest but having the big hunk of money to use is more valuable in the long run. Deal for your best machine price and spread the cost out.
 
To take a more pessamistic (realistic?) view if the national economy goes belly-up and bad as some pundits are forecasting you might be better off stashing as much cash as possible, they can't reposses that, I would be much happier sitting on a nice bundle of cash than a paid off machine that I don't have any work for.
 
You want to make money, or you want to make payments?

Having MONEY beats the snot out of having CREDIT.

Buy the machine outright, or pay off any financing as fast as humanly possible.

You can mothball a machine that's idle for lack of work if it's paid for. If you're paying on debt, it's get work or die.
I'd rather have a lot less "life or death" money going OUT every month.

A paid for machine makes you money... a financed one makes payments.

Just my opinion.. which is contrary to the prevailing idea that "debt is good, money is bad".

Paul F.
 
If I had to do it again, I would do the same thing. I bought my first CNC machines used, it was 1 mill and 1 lathe. I borrowed the $ from the bank, the one that we already had a track record with. We paid both of them off in 4 years. It was similar to buying a new pickup truck and paying it off on a monthly basis. It is best to have at least 3 or 4 good customers that you can sort of rely on to give you enough work to help with the payments. You will sleep much better.
 
If the economy goes into a tailspin and inflation takes over. The buying power of your pile of gets gets effectively smaller. I would be much more comfortable relying on the needs of my local economy than having to rely on a pile of cash to get me through.

Strong economy or weak, goods and services are always needed. The one that make it are best at adjusting their work and catering to these needs.
 
I believe if you look up about any literature on the subject of capital investment in a business that financing us usually put ahead of outright purchases. If the machine is worth buying, then paying over time keeps more cash in your hands. If all your cash is tied up in the machine, you have nothing for other expenses and growth. Even if a financed machine can't make it's worth, it is more likely to recover more of the remaining cost in a sale than having all the money already tied up in a machine, that money will depreciate being used or not. Mothballing a paid machine is money setting around loosing value every day it sets.

I recall a company that stored some 486 computers they had paid over $20,000 each. Thinking they would put them to use in another branch. They eventually had to pay to have the old obsolete computers hauled away and never got the use out of them that the current date would have provided...or at least sell at a loss while they still had some value. We all know that technology is nothing to set on. A CNC machine quickly reduces to it's basic castings in a short time as the stuff that runs it is improved. Many of these not so old machines go to the scrap pile since the cost of repair is too high compared to replacement with higher performance.
 
I'm not a CNC shop, but I can't see that makes any difference a machinetool is a machine tool.

First of all I'd think very carefully how much of your desire to get a machine is need and how much is want, be realistic and honest with yourself, there's a big difference between the two.

My way, if you possibly can, pay for it, ok if work takes a dip you mightn't have the backup, but niether will you be making payments every month.
I've done it both ways, and I know which gives me a better nights sleep.

If things get real bad, i.e costs getting tighter, you can still put bread on the table as without payments you can cut the rate.

Forget credit records, when it comes to the crunch they ain't worth the paper they're written on. - think sub prime and the credit rating agencies who backed the whole thing - ............ a credit records only good until the first late / missed payment.

Some will say finance etc have tax advantages, maybe? but first you've got to make enough to pay tax.

Another way to rebuild savings and capitol - Borrow money from yourself, if I dip in to savings I pay myself back much in the way I'd a finance payment...... and if I've gotta miss a couple big vinny doesn't come calling:)

From a pessimistic grumpy old git.
 
Right now it's advantageous to buy machines outright as you can write off the full purchase price in the first year. The limit is $124,000 or there abouts.

Since you're talking about starting this over the next 12 mos, that leads me to believe you have another source of income - how nice to be able to eliminate your tax burden now, rather than later when you may not have any profits to be owing on.

I actually bought too much machinery last year. I don't have any tax liability for 2007, and had I waited, I could've spread it over into this year.

Keep in mind, the feds don't expect you to be in the black for at least the first 3 years.
 
MechWorks;

You can put whatever shiny face on debt you want..
I'll reiterate; A PAID FOR machine brings in pure profit. A financed one has to "earn it's keep" by making payments.

Naturally, your goal is 100% up-time, turning out work.
When that doesn't happen, a PAID FOR machine isn't LOSING you anything sitting idle. It's not making money, but it's not losing it either.
A financed machine is losing money every minute, of every day. Not only it's purchase price, but INTEREST.

Paying cash for a machine gives you an automatic "price break" because you're not paying interest, late fees, etc.

Paying cash for a machine doesn't "tie up your cash"... if buying the machine brings your operating cash pool to "zero", then you couldn't afford the machine to begin with!
You SAVE money to make a capital purchase... that means having money ABOVE your operating capital before you buy.

Debt is not your friend.
Good credit doesn't build you wealth, doesn't pay you any better, and doesn't make your pecker any bigger.

Cash does. (except that bigger pecker part...).
If you're NOT in debt, then every dollar that comes in (after you pay overhead) increases your WORKING capital, and becomes REAL CASH MONEY... Real money doesn't cost you interest. Debt does. It's like having X% bigger a paycheck every month, because YOU'RE NOT PAYING THAT in order to borrow the money!

And yes, it's only my opinion...
Paul F.
 
My experience has been if you buy a horizontal machining center , a dozen Vertical machining center jobs will come through the door, and vice verse.

So unless you have the Jobs for one or the other to sustain your shop, be careful.
 
The situation is different for everyone.

Some folks average over 10% annually in their investments. These folks, at the very least, break even by financing at 8-9% over 5-7 years.

If you don't invest, you can still get 4% on an ING direct account, which effectively offsets half of your machine interest.

If you're a compulsive spender, better pay cash now before getting yourself into trouble.
 
Naturally, your goal is 100% up-time, turning out work.
When that doesn't happen, a PAID FOR machine isn't LOSING you anything sitting idle. It's not making money, but it's not losing it either.

That depends on the point of view. The machine has value, so you could sell it, put the money in the bank and get interest from the money.

Most serial entrepreneurs and professional investors will go to great lengths to avoid paying anything downright. Cash is king, and holding on to it give you more flexibility. Most new businesses fail for lack of liquidity, not lack of owning things. The advantage of leasing is especially great as it reduces you risk starting up considerably, and you have the option of buying later on. (When you know how the business will turn out).
 
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Right now it's advantageous to buy machines outright as you can write off the full purchase price in the first year. The limit is $124,000 or there abouts.

It's actually even better than that. For 2008's sec 179, you can expense up to $250K if your total equipment acquisitions for the year is below $800k.
 
I am planning on starting my shop in the next 12 monthes and am looking at purchasing a Haas Mini Mill 2 as my first machine.

BTW, consider the Sharp SV-2412 instead. Lots of owners of that machine on this forum. Much more rigid machine plus an extra 8" of X travel.
 
A friend who had to shut down his business and for whom we are now storing some of his obselete machines (for ever probably) told us that when he talked to his bank manager he said 'you've done it the wrong way round; you should have leased your machines and bought the property; instead of which you now own a lot of worthless scrap iron and owe a lot of rent'

Regards,

Mike.
 
At the same in my business( contractor) they will finance a lot of my equipment for free just for the sale. Needed less to say I will all is work with someone else's money at that price. Then the banks money on plastic with rewards back to me. And then when it is going to start to cost me interest I pay it off. :-)
 
Paul F..."A PAID FOR machine brings in pure profit. A financed one has to "earn it's keep" by making payments."


The guy says he has the cash. He can pay for it any time he wants. Paid or finananced (less finanace and interest) is simply the cost of the machine. It is the same cost, paid now or paid later. The big difference is where the cash is at. In your hands or in the machine. There is no "pure profit" because you still have to pay for that machine because you are in the hole the cost of that machine. Until it makes enough money to repay it's cost, there is no profit. Gross income minus machine cost minus operating expenses equals profit (maybe).

Buying a machine for cash indeed ties up your money. You only touch that money as the machine completes some sold work. Financed, a machine can pay for it's bills without all your money tied up in the machine itself. The machine still makes money over a period of time while your extra money is out doing things to increase it's value. Money setting tied up in a machine doesn't come back until the cost of the materials it cuts, the energy, consumables and maintenance required to keep it running are recovered in goods sold (that is before profit). Very few businesses can be started or ran with outright purchases and still have money for everything else.

A good decision comes from a business plan and knowing when things will be paid off and what money is available during that time. Dumping all of your money into startup can leave you short of needed operating funds. Waiting for enough money to buy infastructure and operating funds to be collected before going into business is a good way to never go into business. A business plan may involve a bit of crystal ball work but if things are too hard to see or figure out then the venture is most likely not going to do well...and no one will finanace that.
 
I'm not a CNC shop so take this FWIW, but I'd buy the CNC as my *last* machine.

This way, instead of saying..."oh no, I need a cold saw" and the CNC sits idle while you try to track down a deal on a good used cold saw...or you buy a new one at that price premium when pressed for time. There are probably other machines you need too...I'd want some sort of basic lathe capacity, possibly welding equipment too.

I think you are in a good situation, really the best situation with the flexibility to go either way, and so IMHO it makes sense to finance if you can get a low interest rate...of course make sure there's no penalty for early payoff if things go really sour.

The other angle on this is that even if there's zero work or you are caught up in trying to make your CAD/CAM/machine programming system work, you can always dip the monthly payments out of your savings.....and the remainder of the savings still will accrue interest as somewhat of an offset.
 
Whether or not you finance or purchase outright, at some point a CPA needs to get involved for your best interests. Terms of depreciation, tax liabilities, equipment taxes etc.

An upfront plan is better than a catchup at the end of the day.
 








 
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