Recently, I was talking to a client about their desire to automate parts of their business to stay competitive.
It’s a conversation I’ve had many times before in my 30 years working with middle market business owners: automation has been the number one consideration when they are looking to make investments in their companies.
And while it’s a recurring discussion that will be ongoing for years to come, we’re seeing the pace of financing requests for automation projects come at a faster clip as we emerge from the COVID-19 pandemic.
The rapid spread of COVID-19 shined a spotlight on the vulnerability of anyone spending hours in proximity with others, whether that be a meatpacking plant, an industrial factory or an office building. But manufacturing, in particular, is experiencing the added challenge of having to navigate extreme price increases for raw materials amid pandemic-induced shortages, coupled with steady wage growth and difficulty in filling open positions.
For these reasons, automation has become critical to success for some middle market employers, and any company that’s limited in its ability to distance workers — food purveyors make up a large portion of this — is looking at a big increase in automation spending.
At CIBC we work with our clients to finance equipment purchases in a few ways, including long-term credit lines for multi-year capital improvement projects, as well as term financing for one-off investments. The main considerations for the business owner will be the investment return sought, the cash flow they have available to pay the debt, and the overall balance sheet impact of the investment.
One of the biggest mistakes a middle market company can make is to invest in automation designed to support growth when demand for their products isn’t meeting the expectations. The type of equipment is important too. Can it be modified to meet changing business needs? In some cases, a company may be considering internationally made equipment and have to consider whether parts or service will be challenging to obtain, especially as we recover from the pandemic.
On the plus side, we have been in a low interest rate environment for the past 13 years, with only a limited reaction in the markets to COVID-19. And while that provides a nice cushion for a business to invest in large-scale capital improvements, the real incentive needs to be about growth and efficiency in the production process rather than the relative cheap cost of borrowing.
If you are considering an investment in automation, here are three questions to ask yourself:
- What is the demand for my product? What did sales trends look like before the pandemic and what are sales projections as the economy recovers? If the pandemic tempered demand but sales are picking up, the investment could be worthwhile.
- Would automation enable me to pivot swiftly? Companies that were nimble and could shift production to adjacent products fared well during the pandemic. Would your investment give you greater flexibility in responding to market conditions?
- Does the investment make me more or less dependent on outside variables? International supply chains are vulnerable. Do you risk losing operational time if supply chain delays impact your ability to repair or upgrade new equipment?
Your CIBC commercial banker can help you consider these and other questions. If a move to introduce or expand automation is right for you, we’ll help you craft custom financing solutions to realize your ambitions.
