3 Financing Options for SMT buyers

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Surface mount technology (SMT) machines are an integral part of the electronic manufacturing services (EMS) industry. The advan­tages of SMT over through-hole tech­nology have created a unique niche for SMT machines in the electronics manufacturing zone. These machines also help Indian companies reach global standards by superseding all other technologies. However, despite the importance of possessing these machines, very few Indian manufac­turers can afford to buy SMT equip­ment as it is too expensive.

By Jesus Milton Rousseau S

Friday, August 16, 2009: Currently, the price range of SMT machines starts from USD 50,000 for a compact multi mounter and goes up to USD 300,000 for a high speed chip shooter—a sum most people will find to be out of their reach. However, there are ways and means of purchasing SMT equipment without feeling the burden of the heavy price all at once. The best and most viable methods to buy SMT machines are by self funding, through bank loans or SMT vendor financing.

Self funding

As per trends in the industry, self fund­ing isone ofthemost preferred methods for purchasing SMT machines. Mukesh Gupta, managing director, Smile Elec­tronics, a major electronic contract manufacturing services provider, says, “A majority of our machines were bought with self funding.”

Even Elcoteq Electronics India, Bengaluru, a leading EMS company in the field of communications technol­ogy, has purchased SMT machines by utilising its own funds. “The Elcoteq Group communicates closely with local management expertise and leverages global resources to support local facilities. In fact, that’s the usual practice for Elcoteq. Investments were primarily earmarked by the group for production machinery according to Elcoteq SE’s annual report 2008,” adds Sukvinder Kumar, general manager, Elcoteq Electronics India Pvt Ltd.

The problem is that most compa­nies don’t have the capital required for self funding, which brings us to the next option—bank loans.

BANK LOANS FOR BUYING SMT MACHINES ADVANTAGES

  • Supportive funding—the company needs to invest only 25 per cent whereas the bank shells out the rest of the 75 per cent
  • Loans can be repaid within a period of 5-7 years
  • Cash profits can be retained in the books for better working capital returns
  • Improves the operating ratios and, in turn, helps while negotiating for WC
  • Interest cost subsequent to installation can be considered as revenue expenses and in turn reduce corporate tax
  • Helps in RoI improvement due to delayed repayment
  • In case of purchase against L/C, buyers’ credit arrangement through foreign banks is benefited due to low rate of interest (linked to LIBOR) and the payment could be rolled over up to 360 days
  • Free cash flow in the books is always advantageous to corporates for valuation purposes

Disadvantages

  • Interest rates are very high compared to foreign banks, which offer much lower rates
  • Bank loans require heavy personal guarantee, with collaterals, etc
  • Involves tedious paper work
  • Banks extend little support to SMEs and are tough on financing

Bank loans

Phanisha K N, vice president, finance, Rangsons Electronics Pvt Ltd, an EMS firm that is engaged in contract manu­facturing for the ‘high mix high tech­nology’ (HMHT) sectors, says, “We do buy SMT machines periodically to increase our capacity and update our capabilities. The machines are bought through self funding as well as bank loans.”

Jarmo Kolehmainen, managing director, Incap Contract Manufac­turing Services Pvt Ltd, a company specialising in the manufacture of electronics and box build products, shares, “The acquisition of the TVS-electronics contract manufacturing services business was done with Incap’s own equity as well as local bank loans. Both funds have been used for new machinery, inlcuding SMT lines. The advantage of loans is that the capital can be used in the most efficient way.”

Suggesting how to get loans easily and stating their advantage, Subhash Goyal, managing director, Digital Circuits Pvt Ltd, a leading EMS com­pany, says, “It is easier to get loans from banks with whom the company has been banking regularly and has a good relationship. The advantage is that the company only has to invest 25 per cent while the bank invests the rest of the 75 per cent and the company can repay the loan in five to seven years.”

There are two types of loans— term loans and working capital (WC).

PROBLEMS WITH SMT VENDOR FUNDING

Vendor financing turns out to be a more financially exacting alternative as most vendors are international play­ers and foreign bank charges vary from country to country. Instead, if one goes in for upfront payment through bank finance, he can harness more negotia­tion power. There is a possibility of acquiring credit through the bank at a prime lending rate (PLR) of 50-200 basis points only, which works out to be less than 5 per cent

SMT vendors, on the other hand, offer a credit period of 360 days at an interest rate of 6 per cent per annum, with the following costs involved:

L/C establishment cost, which is approximately 0.75 per cent

L/C usance interest for 360 days at 6 per cent

Foreign bank charges—varies from country to country and bank to bank (could amount to $100-1,000 or sometimes a percentage of the L/C value)

Forex fluctuation risk or if one opts for forward cover, a forward premium of 2-4 per cent

Term loans need collaterals and se­curities and are used for expansion of the manufacturing unit, purchase of machinery, etc. WC is generally used for purchase of raw materials. “The security on the SMT machines to be acquired and other collateral and personal guarantees are obtained from companies depending upon the size of the loan amount,” adds R K Bansal, CFO, IDBI Bank Ltd.

Loans from commercial banks are always based on the financial strength of the company and internal analysis on its return on investment (RoI). Also, the potential of the Indian EMS busi­ness scenario helps in raising funds. Phanisha cites, “We prefer to go with the commercial banks for loans.”

However, loans require a lot of per­sonal guarantees with collaterals, etc. “Also, banks extend little support to small and medium sized enterprises (SMEs) and are tough on financing,” says Gupta.

SMT vendor funding

A majority of SMT manufacturing companies don’t offer direct fund­ing but do offer indirect support in the form of deferred payments. Parvindar Singh, managing direc­tor, ASYS Group, a manufacturer of screen printers, process machines, handling systems as well as special machines for the electronics industry, says, “We do not offer financing but accept deferred payments backed by either a letter of credit (L/C) or a bank guarantee. This is because as a foreign company, we will not be able to col­lect payments due to the restrictions imposed by the Indian government on the transfer of payments overseas.”

Even Suresh Nair, vice president, Leaptech Corporation, which offers automation equipment for PCB as­sembly, semiconductors and for the automotive segment, adds, “We offer special payment terms like L/Cs, with a certain usance (interest paid on bor­rowed money) period. In some special cases, deferred payment terms are also offered as we take orders on our principals’ behalf and the machine is supplied directly to the customers.”

Amit Madan, country manager, India, Trans Technology India Pvt Ltd, a leading supplier of SMT equipment in Southeast Asia, says, “We accept L/Cs at usance. The benchmark Lon­don interbank offered rate (LIBOR) and the risk premium are charged for usance L/Cs. The extent of the risk premium depends on the credit worthiness of the client, which is as­sessed after a thorough perusal of his audited financial statements for the previous year.” Adds Bansal, “L/C is a normal banking business practice, which needs prior approval of the sanctioning authorities and also at­tracts security by way of assets.”

Electronics Bazaar, South Asia’s No. 1 electronics B2B sourcing magazine

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