Equipment as Collateral: Best Practices in Material Handling and Robotics Lending

Key Takeaways:

• Automation is transforming manufacturing and distribution
  • Material handling systems have evolved from manual processes to advanced technologies like robotics, AI, and IoT, making automation essential for competitiveness and growth.
• Financing automation is critical for adoption
  • Businesses must leverage smart financing strategies to manage the high upfront costs of robotics and material handling systems.
• Four main financing options for automation investments
  • Equipment loans: Use owned equipment as collateral for lower interest rates and faster approvals.
  • Equipment leases: Pay for usage over time, stay current with technology, and avoid large upfront costs.
  • Equipment refinancing: Replace or consolidate existing loans using current equipment value to free up capital.
  • As-a-service programs (EaaS): Subscription-based access to equipment and maintenance, reducing upfront investment.
• Best practices for financing automation
  • Analyze pros and cons of loans vs. leases vs. EaaS to align with cash flow and growth goals.
  • Choose a financing partner, not just a provider, for tailored solutions and industry expertise.
  • Customize financing structures to support unique automation needs and maintain flexibility.

To say that automation is changing the game in manufacturing, distribution and operations is a gross understatement. In just a few decades, material handling systems alone have shifted from primarily manual tasks to advanced technology that includes robotics, artificial intelligence and the Internet of Things. More and more shop floors are incorporating robotics as companies strive to work smarter. 

All of that technology may be essential to remain competitive, streamline operations and continue growing. But it also comes at a cost. Businesses must find effective ways to finance these advances, and utilize best practices to make decisions that are as smart as the technology they are employing. 

Financing options

Several financing options are available for businesses looking to use their equipment as collateral. They include:

• Equipment loan. Companies which own a significant amount of equipment can use that equipment as collateral to take out a loan for the purchase of advanced material handling and robotics systems. Lenders will look at the collateral’s valuation to help define the loan’s terms. As a purchase loan is a secured loan, it can often mean lower interest rates and faster approval than other forms of financing. Loan terms can be tailored to a company’s needs.
   
• Equipment lease. In a leasing agreement, a company pays to use the material handling and robotics systems it needs for a designated period of time. At the end of the lease, the company may be able to return, purchase or extend the lease. This form of financing can be very helpful as companies stay up to date with current technology while avoiding upfront purchase costs.
   
• Equipment refinancing. Businesses can also use existing equipment as collateral to replace, or consolidate, existing loans or leases. A professional appraisal will determine current market value, which a lender will use to underwrite a new loan. As new loans and leases may offer lower interest rates, repayment terms and/or lower monthly payments, equipment refinancing can help companies obtain what they need to maintain or accelerate growth while freeing up capital.
   
• As-a-service programs. As-a-service financing provides a way to purchase products and services without a large upfront investment. Typically operating on a subscription payment plan, an as-a-service agreement allows a company to access new equipment and technologies on a regular basis. It can be particularly helpful for businesses that need to stay current with the latest robotics equipment or material handling systems.

Best practices

• Weigh your options carefully. With several viable ways to use equipment as collateral in financing, take time to weigh and analyze the pros and cons of each carefully. For example, if you finance the purchase of a material handling system, a piece of robotics equipment, or another item with a loan that requires a large down payment, your cash flow will be affected. You will, though, own the equipment and be able to use it as you wish for as long as you want. You’ll be able to decide when or if to sell it (understanding that depreciation will impact residual value).
  
  Leasing will often afford lower monthly payments, and comes with no warranty, insurance, transportation or storage costs. On the other hand, you’ll generally pay more with leasing over the long run than if you buy equipment outright. 
  
  You may find equipment-as-a-service (EaaS) financing helpful when it comes to maintenance costs. Instead of working with separate maintenance agreements, as-a-service financing often includes maintenance for the equipment. 
   
• Choose a financing partner wisely. Note first that a financing partner differs from a financing provider. A partner will work to understand your individual company and your goals, focusing on long-term growth. 
  
  A good financing partner can work with you to evaluate the advantages and disadvantages of each financing option. Providers who know and understand your industry and your business model can be especially valuable, and suggest alternatives that work specifically for your business. For instance, they may be able to structure an EaaS financing program that packages usage-based billing for equipment with maintenance costs. Some financing providers even offer a structure where they own the equipment assets and lease them back to customers. In that way, the provider assumes the residual risk, eases the financial process and allows the customer to focus on core competencies.
   
• Customize. Standard lease and loan financing may work well for some equipment financing. But as automation grows in unique ways in businesses, so does the need for unique financing. Companies incorporating robotics and other automation into their equipment purchases and systems – such as material handling – will benefit tremendously from experienced partners that know equipment, electronics and automation as well as they know finance. 
  
  True finance partners that employ a collaborative consultative approach will work to develop tailored programs to meet your company’s needs. They can construct finance-forward models using equipment as collateral that will help maintain business cycle flexibility, meet working capital needs and stay on track with growth goals.

Financing that growth will take innovative, finance-forward solutions. Mitsubishi HC Capital America is a non-captive, non-bank commercial finance company that provides customized solutions to help organizations of all sizes accelerate growth. Our experts throughout the United States are serious about working with businesses to develop financing programs that work for their automation needs. To learn more, contact us.