Alternative Financing Fills the Gap Left by Banks in Mexico Border Factories
When in need of new industrial machinery or commercial equipment, financing or leasing equipment instead of owning it can be a valuable business strategy for U.S. manufacturers running operations or maquiladoras in Mexico, especially those with limited access to capital.
- Leasing allows them to use the equipment for a determined period of time, usually at a lower cost than purchasing the equipment outright.
- Payments for an operating lease are not recorded in the company’s balance sheet because they are treated as operating expenses and not as debt.
- Leasing also eliminates costs related to the disposal of equipment assets.
Equipment leasing for maquiladoras in Mexico has benefits and challenges. Acrecent Financial effectively addresses these challenges to provide sound equipment financing solutions for maquiladoras.
|What is a maquiladora?: A maquiladora is a factory located near the U.S.-Mexico border that operates under a favorable duty- or tariff-free basis. It imports raw materials and equipment for assembly, processing or manufacturing in Mexico to be exported. Maquiladoras are a product of the Maquiladora, Manufacturing and Export Services Industry program (known as IMMEX), established in Mexico in the 1960s to attract foreign investment and jointly administered by Mexico and the U.S. The industry accounts for 65 percent of Mexico’s exports and employs 30 percent of its workforce.|
The Bank Dilemma
Like most small- and medium-sized manufacturers, maquiladoras have few financing options. The U.S. parent company initially turns to its bank or leasing company when looking for financing options to acquire equipment for its Mexico operations. Most traditional financing institutions do not engage in cross-border, international trade transactions in Central America, especially if the transaction amount is not attractive enough for their business.
A common Plan B is to have the maquiladora search for financing options in Mexico, where they often face a different set of challenges:
- Mexico bank loans normally are backed up by real estate, contract collecetion rights, and strong balance sheets, but most manufacturing companies with less than two years of operation do not have these and thus have no meaningful financing assets for banks to leverage as collateral.
- Cash flow can be an issue because most of the time it is controlled by the parent company, while margins are kept low to limit local profits.
- Mexico banks also tend to prefer to dealing with local decision makers rather than parent companies in foreign countries.
Equipment Financing Risks and Challenges
Financial institutions evaluate and take risks every day. Calculated risks pump oxygen into the business after they are turned into profits. Unmitigated risks can deflate a business if they turn into losses. To avoid losses, financial institutions must be disciplined when evaluating the credit risk profile of applicants for equipment leasing for maquiladoras in Mexico.
When considering an equipment lease application for a maquiladora, the lessor must work around the following common challenges:
- The equipment is temporarily imported to Mexico.
Leasing contracts are highly dependent on the location of the equipment. Beyond making rental payments, lessees frequently are responsible for insuring the equipment and providing preventive maintenance. A temporary location complicates these transactions, making them not worth the trouble for many financial institutions.
- The parent company is using a shelter maquiladora company.
If the parent company does not have a self-owned subsidiary, the third-party shelter company will need to be included in the credit analysis and may affect the company’s credit and risk profile.
- The parent company has a recently established self-owned maquiladora.
If the parent company has a self-owned subsidiary, it typically has not been in business long and operates under low margins. Consequently, the company may not be deemed credit worthy by a traditional institution.
To finance equipment in Mexico under operating and finance leases, U.S. manufacturers should consider alternative sources of financing provided by a company with specialized knowledge in export finance for maquiladoras.
Equipment Leasing for Maquiladoras Solutions
The Maquiladora Program offers many cost-saving benefits to U.S. and foreign manufacturers, particularly when they partner with a company that understands the financial, legal, political, economical and cultural idiosyncrasies of establishing and running a maquiladora operation in Mexico.
Acrecent Financial takes a different approach to equipment leasing for maquiladoras. Instead of expecting maquiladoras to fit the mold, Acrecent molds itself to fit maquiladoras’ needs—making smaller loans, assuming more risk, offering diverse financing options, and paying sooner than traditional banks.
Acrecent Financial provides:
- Case-by-case business analysis and custom financing solutions.
- Bulk of credit analysis based on parent company’s track record, management experience, and business and market projections.
- Specialized team that designs custom structures and offers a variety of products: term loans, true leases, operating leases, progress payment financing.
- Business intelligence in the maquiladora industry and extensive experience conducting business in Mexico and in the U.S. Fully bilingual staff.
Let Us Help
Why go at it alone when you don’t have to? Given the complex nature of the maquiladora industry and its specific financing challenges, you have nothing to lose and everything to gain with Acrecent Financial by your side. It’s a no brainer.
For more information about Acrecent Financial’s export finance and equipment lease solutions for your or your customers’ operations in Mexico and the U.S., contact us.