In the August 2003 issue of A2C2, I wrote a guest editorial that briefly described the advantages of financing clean rooms for the small to mid-size corporation. In this article, I will give a more detailed description of the advantages of cleanroom financing, and I will present a set of calculations that managers of these corporations can use to more precisely decide on the final dollar value of the cleanroom that they wish to build.

In the August 2003 issue of A2C2, I wrote a guest editorial that briefly described the advantages of financing clean rooms for the small to mid-size corporation. In this article, I will give a more detailed description of the advantages of cleanroom financing, and I will present a set of calculations that managers of these corporations can use to more precisely decide on the final dollar value of the cleanroom that they wish to build.

Financing is obviously about numbers; but it is also about a thought process. I will offer advice that will help corporate managers find a starting point in deciding about the details of a cleanroom design. In addition, I hope to enhance their understanding of the financial alternatives available to them. This understanding is extremely important at all phases of the creation of a clea room, but is especially crucial when the initial commitment to build is made.

Obviously, the first advantage to financing a cleanroom is that your corporation will not have to pay out a large sum of money all at once. Cash is preserved for both expected and unexpected expenses and cash flow is managed. In addition to providing this flexibility, financing allows senior managers to begin to think about building the cleanroom that they need, rather than the one that they think they can currently afford. The importance of this change in thought process cannot be overstated. Too often, senior managers of firms assign a somewhat arbitrary dollar amount for their cleanroom budget. This amount may reflect the current amount of cash on hand, but it may not take into account the current and future needs of your corporation. In fact, the current cash position of your firm should have little to do with planning a cleanroom. Under-building a cleanroom can often be a mistake that haunts a corporation for years. Given the importance of building the right cleanroom, it is only a slight exaggeration to say that the managers of your firm should start the process by deciding what to build and worry about how to pay for it later in the process.

I often make the comparison between a corporation building a cleanroom and an individual building or buying a house. The overwhelming majority of people finance the purchase of their homes. They begin the decision making process by deciding what kind of house they need given family size, life style, etc. Then they usually decide whether they can afford the house that they want, not based on the overall cost of the house, but based on the monthly mortgage payment that they will have to incur. If the monthly payment is manageable, given a particular income level and budget, the individual will probably buy the house. If we all had to pay cash for our homes, very few of us would get the home that we want and need. The same can be true for small to mid-size corporations building cleanrooms. Financing all or part of your cleanroom can be the mechanism for your corporation to truly get what it needs.

Two other advantages of financing cleanrooms should be mentioned. First, financing provides tax advantages. I am not going to go into a detailed discussion of tax issues. The tax picture for corporations varies so widely that any specific presentation would be fruitless. Suffice it to say that interest payments are tax deductible and make the after tax cost of borrowing lower.

In addition, financing cleanrooms using an outside lending source specifically devoted to equipment financing usually preserves bank lines of credit. Most small to mid-size corporations have banking relationships with lines of credit that they can draw on as needed. The terms of these lines are based on the financial strength of the firm. Although some corporations choose to finance cleanroom purchases with their lines of credit, this can often be a mistake because their lines of credit may be dramatically depleted, leaving the corporation in a vulnerable position. Financing the purchase with an outside lending source may preserve bank credit. A specific asset is matched against a specific liability, and the strength of the corporation is preserved. Obviously, the preservation of bank lines in this example would not be a certainty, but it is an option that any corporation should explore.

Table 1 shows the monthly pretax payments for cleanrooms costing $500,000 up to $2,000,000. The monthly payments assume 5-year, 7-year, and 10-year financing at 6 12 %. This rate is arbitrary and would vary based on the financial strength of the corporation in question. This table can be used as a tool to help managers of your company calculate the final dollar value of the project based on marginal cost/ benefit analysis.

For example, let’s assume that your company has decided to build a $1,000,000 cleanroom and chooses to finance it for 7 years. The monthly payment during that seven year period will be $14,849. In Table 1, one can see that the cost of a $1,250,000 financing for 7 years is $18,562. Therefore, the additional monthly cost of building a more elaborate ($250,000 more elaborate) cleanroom is $18,562 - $14,849 = $3712. The managers of your corporation now know the marginal cost of adding $250,000 to the project. Obviously, your company must be getting something for the additional $250,000, usually the ability to perform more sophisticated scientific applications that will generate more revenue for your company. What is the additional projected revenue that would come from building the more expensive cleanroom? If it is more than $3712.35 per month, then it makes sense to spend the additional $250,000 for your cleanroom.

Obviously, the decision making process in the example above is overly simple. However, it does illustrate the point. Knowing projected revenues and precise costs allows managers to make informed, rational choices about the size of their cleanroom. As an outsider and a non-technical person, I cannot presume to tell senior management what the added marginal revenue will be for a more expensive project. But as a financial consultant, I can tell them what the marginal increase in monthly expense will be for the more expensive room. Information on one side of the analysis can help managers make a final decision on the absolute size of a cleanroom and can ultimately help them build the cleanroom they need. As such, financing becomes the means to meeting the present and future needs of your corporation.