3 mistakes to avoid when financing automation projects
Automation technologies are an essential tool for businesses seeking to boost their competitiveness and efficiency. However, these technologies often come at a considerable cost and require financing. For many SMEs, obtaining a loan is a complex process. As a result, many businesses make mistakes that reduce their chances of success, or at the very least, delay the process.
The following is an overview of the three most common mistakes made when applying for financing, along with practical advice on how to correct and prevent them.
1. Not providing enough information
When banks evaluate your loan application, they analyze the level of risk associated with it. The less precise and complete information they have on your situation, the greater the uncertainty. These uncertainties mean increased risk, which can lower your chances of getting your loan, or getting it as quickly as possible.
Detailed, well-organized information is key to keeping the process as smooth and speedy as possible. Thorough preparation, including providing all required documentation and clear financial projections, can significantly enhance the efficiency of the approval process by reducing the need for additional information requests..The following details are often overlooked, but should be included from the very beginning.
Equipment installation site
When banks lend you money to finance a robot or piece of automated equipment, they will usually use the machine as collateral. In practice, this means that they will want to know the exact location where it will be installed.
This information is essential for the bank, as it must be able to locate and, if necessary, recover the machine in the event of default, explains Paul Sadhra, Business Centre Manager at BDC. This information could also affect the structure of the loan.
“It’s very important to specify where the equipment will be installed,” says Sadhra. “Will it be installed at your plant in Montreal, for instance, or in Vancouver? Will the equipment be mobile? Will you be sending it to an overseas facility?”
Your machine’s regulatory compliance
Industrial equipment must comply with a set of standards, such as those established by the Canadian Standards Association (CSA). They ensure machine performance and safety, in particular.
A business that purchases non-compliant equipment exposes itself not only to safety risks for its employees, but also to operational delays: an inspector could order the immediate shutdown of a robot that fails to comply with standards, thereby crippling your operations.
According to Amber Green, Senior Advisor, Strategy Implementation, at BDC, banks understandably take these aspects very seriously. “They see non-compliant equipment as an increased risk, both to the continuity of your operations and to the bank's investment.”
Make sure, therefore, that all automated equipment complies with standards. Provide concrete evidence, such as certificates or compliance documents, to demonstrate that the machine is safe and ready for use. This transparency will reinforce the bank’s confidence and make it easier to approve your loan.
Origin of your equipment
Usually, getting a machine from a supplier located in your province, or even elsewhere in the country, is relatively simple. Purchasing equipment from abroad, however, can be far more complicated.
If so, you will probably need to obtain a letter of credit from your bank. This is a financial contract between you, your bank and the supplier, guaranteeing that payment will be made once the conditions of the letter of credit have been met.
To avoid delays and speed up the process, make sure you tell your bank from the outset whether the equipment will be purchased from a Canadian supplier or imported, advises Sadhra. “This will enable your financial institution to guide you through the necessary steps efficiently.”
Payment terms
Payment terms will vary from one supplier to another, and from one machine to another, explains Sadhra. If you purchase a simple, inexpensive machine from a supplier two blocks from your plant, payment could be made upon delivery, in one payment.
“Suppose, however, that you buy a complex piece of custom-built equipment over a two-year period,” he says. “The supplier will then probably ask you for payment in installments.”
For example, you may be required to make a deposit before manufacturing begins, make several interim payments, pay an amount when the equipment is ready and lastly, settle the balance upon delivery.
As in the previous cases, these details are important to your bank as they will influence the structure of your loan. Before reaching out to a bank, make sure you have the signed letter of intent containing the payment terms agreed with the supplier, as this can provide clarity on your financial commitments and enhance the bank's confidence in your loan application.
2. Submitting an incomplete business plan
Many SMEs reach out to their bank without a complete, thorough, realistic and detailed business plan, which can delay the loan approval proces. It is a mistake that continues to delay many automation projects.
Lenders seek solid guarantees before investing, wishing to ensure that the project will be profitable and that the business will be able to repay the loan within the agreed timeframes. A well-structured business plan is therefore key to establishing the viability of the project and inspiring confidence in lenders.
Here are some key elements to include in your business plan.
Sales forecast
Your bank will want to know what additional revenue you can generate with your new automated equipment. Include detailed, realistic sales forecasts, based on market analyses and other relevant data, for example.
These forecasts will give your bank a better understanding of your project’s potential for growth and profitability. Remember to also include profit projections, to provide a complete view of the financial impact of the investment.
Impact on your operations
The financial forecasts in your business plan may seem unrealistic if you don’t explain how your new machine will improve your operations and productivity, explains Green.
“For example, based on documents such as those produced by an integrator, specify that your machine will eventually increase your production from 150 to 400 units per hour.”
If you expect your machine to enable you to redirect employees to other tasks, or to add an overnight production shift, mention it.
“If your business plan predicts increased sales, providing a detailed strategy on how these sales will be achieved can significantly enhance the bank's confidence in your loan application,” says Green. “This is very important. You need to support and justify your forecasts.”
3. Lack of strategic intent
Automated equipment does more than just replace humans on your production line—it transforms your processes and your manufacturing methods .
When reaching out to your bank, you should ideally have a strategic intent for the future of your business, advises Sadhra.
Developing a strategic plan can significantly enhance a business owner's ability to set clear goals, allocate resources effectively, and navigate market challenges. Where do they see themselves in five or 10 years? Why do they want to purchase an automated machine, beyond its immediate benefits? What is their vision?
Sadhra believes that drawing up a strategic plan can significantly enhance the success of an automation project by clearly outlining goals, resources, and potential challenges. This document will not necessarily be presented to the bank when applying for a loan, he adds. “But it will help business owners clarify their goals and write a solid and coherent business plan, focused on the long term. It will also boost the lender’s confidence by demonstrating business reliability and foresight.”
Next step
Learn how to plan and successfully execute industrial automation projects in your company by downloading our guide, Harnessing the Power of Industrial Automation and Robotics.