Financing robots and machines: what options are available?

Dutch companies are using new technologies such as robots and advanced, automated machines in increasing numbers and scale. The core function of robots and machines is to automate physical work and - especially in the case of robots - intelligent interaction with the environment. Robotization and automation reduces the need for people to do physical work. Instead, robots and automated machines provide labor.

Thus, the benefits are not only economic (such as shorter process times and better/constant product quality), but also ergonomic (such as replacing dirty, heavy and/or repetitive labor). In short, robots and automated machines can be very interesting for some companies - especially manufacturing companies - for several reasons.

When purchasing robots and machines, it is important to think carefully about the method of financing. To this end, I have listed the most common forms.

Equity

If the company has sufficient financial resources, the robots and machines can be purchased by the company itself. This sounds attractive at first glance.

After all, the company has full ownership, does not have to answer to anyone, and there are no interest charges to pay.

However, purchase from equity is far from always possible as robots and machines often involve substantial investments. Moreover, purchasing from your own capital means that your liquidity deteriorates. That can be risky (as I explained in my article "Cash flow: the lifeblood of your business").

Therefore, other forms of financing may be attractive, especially with today's low interest rates.

(Bank) credits

If the company does not have enough equity to purchase on its own, consideration can be given to borrowing money from a financier for purchase of robots/machines. This can be a bank, but also alternative financiers such as private investors, business angels, (government) funds, etc. Nowadays there are many possibilities.

The credit can then be used to purchase the robot/machine. The advantage is that - as with the purchase from equity - the company itself becomes full owner.

However, as a rule, the financier will demand that she obtain a security right over the robot/machine and any other assets (see also my article "what are securities and what can you do with them" on this subject). This need not be a disadvantage, but if the credit is not repaid, the financier will claim the robot/machine and sell it. It can also then - if other collateral has been provided - enforce these other collateral.

Lease

If a company does not have sufficient financial resources of its own and is unable or unwilling to obtain credit, leasing can be considered.

Leasing involves an agreement in which the lessor gives an asset - in this case, the machine or robot - to the lessee for use for a specified period of time. The lessee pays a fee for that use.

As a rule, there are two different forms of leasing to choose from:

• Financial lease
• Operational lease;

With financial leasing, the financing of the robot/machine is central and the financial risk lies with the lessee (and not the lessor). The lessor merely finances the robot/machine and enables the lessee to use it. In return, the lessee pays back the amount invested by the lessor - plus interest, costs and profit of the lessor - to the lessor in installments.

Often the lessee has the option to purchase the robot/machine from the lessor at the end of the term for a relatively small fee. Financial leases often qualify as "installment plan."

With operational leasing, the focus is not on financing but on the use of the robot/machine. The economic risk lies with the lessor (and not the lessee). The lessee can use the robot/machine for a fee payable, with maintenance costs borne by the lessor.

The robot/machine remains the property of the lessor after the end of the agreement. Thus, the lessor also bears the economic risk of the lease object. Operational leases often qualify as "rentals."

The main advantages of leasing are that robots and machines can be used - even if there are no financial means to buy them oneself - and that it does not affect liquidity. Another advantage is that leasing has many different manifestations which allows for customization (regarding the form of lease, term of the agreement, etc.).

Bank guarantees

A particular concern when financing large (and expensive) robots/machines - especially robots/machines that have yet to be built and where construction takes an extended period of time - is the allocation of risk between seller and buyer.

After all, the seller of the robot/machine will be reluctant to take on the full pre-payment and payment risk. The buyer, in turn, will not want to pay the full purchase price in advance. As a rule, installment payments do not offer a solution, because the value of a half-finished robot/machine does not match the value of the installment payments made.

In practice, therefore, combinations of partial prepayment by the buyer, a payment guarantee to the seller and partial payment afterwards are often used. The goal is a balanced distribution of risk.

A bank guarantee is basically a contract, whereby a bank unconditionally guarantees that an amount of money will be paid to the beneficiary - the seller - if the latter claims it (for example, after delivery of the robot/machine). Thus, a bank guarantee ensures that the seller has certainty that he will eventually be paid.

Buyer will have to provide to its bank a so-called counter-guarantee during the term of the guarantee in case the guarantee is "pulled." An amount is often set aside in the buyer's bank account for this purpose.

Exactly what risk allocation is agreed upon will depend on numerous factors such as bargaining power, commercial interests, etc., and plays a role particularly if one of the parties goes bankrupt.

Conclusion

In this article I have outlined the main forms of financing robots and machines. Of course, other forms of financing are possible, but the forms discussed in this article are the most commonly used. Which form fits best depends on numerous circumstances such as the company's financial situation, the robot or machines in question, acquisition costs, etc.

So it is important to get proper advice on this.