A big purchase order needs a new CNC machine and $60,000 of raw material. Which product for which?

A purchase order large enough to justify a new mill or lathe brings two very different cash needs at once. The machine is a long-lived asset that will run this job and the next hundred. The material for this job — aluminum, steel, titanium — is bought before the first part ships and turns back into cash when the customer pays, thirty to sixty days after delivery. One is a five-year decision. The other is a ninety-day one.

Machinists on the trade forums argue about buying outright versus financing, and the argument is usually about the machine. The material rarely gets discussed, and it is the part that puts shops in trouble, because it comes out of the same account as payroll.

Machine tool dealers finance at the point of sale as a matter of routine. The dealer is paid in full when the machine ships and you pay one monthly figure over three to seven years; the machine secures it. Independent equipment lenders will write the same deal and sometimes better; get both quotes on the same invoice. A shop with a year of deposits and a personal score in the 600s is a normal file, with a down payment of 10 to 20 percent for a newer shop or a used machine.

It is slower than working capital by a few days because the lender wants the quote and the serial number. It is cheaper by a wide margin, and new or used equipment placed in service in the year can generally be expensed under Section 179 up to the annual limit, which on a machine-sized purchase is a large share of the first year's payments.

A working capital loan or cash advance on your last three to six months of deposits, funded in one to three business days. Amounts run half to one and a half times a month's deposits; a shop depositing $80,000 a month can typically cover $60,000 of material in one offer. Send the purchase order with the statements: an underwriter reading a dated PO with net-45 terms from a named customer is reading a receivable, and sizes the offer to it.

Ask for weekly payments and ask what early repayment saves, because the customer's payment will clear the balance in two months and you want a product where two months of borrowing costs two months of money.

If this PO is the first of a series, the shape for the series is a line of credit sized to a month of material, drawn on each order and repaid on each payment. Apply for it after this order has paid and the statements show the higher run rate.

One purchase order is a reason to rent capacity or subcontract the overflow. A machine is a bet that the orders continue. Experienced shop owners in every one of those forum threads ask the same thing before they recommend a lender: is this a machine the shop needed anyway, that the PO happens to justify, or a machine the PO alone justifies? Finance the first. Think harder about the second.