PURCHASE, LEASE OR RENT? 

The 5 Most Important Considerations in Deciding How to Acquire Your Packaging Equipment 

Packaging operations continually evaluate new automated equipment to improve the cost, productivity, profitability, capacity, and quality of their operations, allowing you to stay competitive and fueling growth in terms of supporting existing customers and acquiring new accounts.  This is true for well-established brand owners who experience growing volume and regional expansion, and equally true for Co-Packers, who may take on packaging contracts that are limited in time or have higher risk for new brand launches.

Typically, these evaluations focus on equipment capabilities, service, reliability, the OEM’s reputation and track record, and total cost of ownership.  Financing options – whether it is a straight purchase, a lease, or a rental program, have become another critical factor in deciding which equipment to purchase and from which reputable OEM supplier.  

Rental options for automated packaging equipment have become more popular in the automated packaging equipment market, particularly as interest rates have increased and there is more pressure and scrutiny on your operation’s cash flow.  This reinforces the need for a careful analysis of all financing approaches to your equipment purchase and is just as important as equipment features and capabilities.

Key factors in that evaluation of financing options include the following:

1) Cash Availability

While manufacturing operations typically focus on revenue, cost, and profit, cash availability and projected cash flow are the single most important factor in this evaluation.  “Cash is King” is not just a saying, but a fundamental strategy for your organization’s health and success.  Applying cash analysis to your purchasing options would include:

  • Straight Purchase Option:  This option requires the most cash from your business.  In return for that cash outlay, you can achieve the lowest total cost of ownership, and immediately own title to this asset.  However, you will be paying cash out well ahead of the equipment being in full production and generating cash benefits as you ramp up product shipments.
  • Leasing Options:  This option typically has lower upfront costs, and payments are fixed each month, so your budgeting, financial planning, and cash flow is predictable and dependable.  With leasing options, you can better balance your cash outflow for monthly payments to the leasing company, balanced with the cash inflows from production and revenue generated with the equipment.
  • Rental Options:  This option is typically the most favorable in terms of lowest upfront costs.  Like a lease, rental provides for fixed payments each month, but typically with lower time commitments giving you maximum flexibility to manage your cash flow with the needs of your business.  And rental payment terms typically are the best in terms of matching cash outflows for rental payments with cash inflows from your monthly revenue and production from the equipment.

2) Cost

Care must be taken when evaluating costs and the impact to the profits of your business.  Is the cost of services included in your leasing or rental options?  What are the tax consequences to your various purchase options? What are the leasing and rental agreement termination options and what is the final cost of purchasing the equipment at the end of the term?

  • Straight Purchase Option:  This option will typically generate the lowest purchase cost from the OEM supplier.  You will be responsible for servicing that equipment but may be able to purchase a service agreement for the OEM.  
  • Leasing:  Leasing terms allow you to spread payments over a longer period, typically 3-5 years or more.  This will mean an increase in your total costs, as you are paying interest to the leasing company.  But – you are balancing that higher total cost against a predictable cash flow with limited cash required upfront.
  • Rental:  Costs for your rental contract should include the rental period, and the flexibility the rental contract provides. Rental payments over a 5 year period will be higher than a straight purchase or 5 year lease – but – you have the flexibility of exiting the rental period even as early as 1 year or less.  This would mean your total cost for that 1 year is far less than a lease or purchase.  You should always include the rental term period in your cost analysis.  Renting the automation equipment for your line for a seasonal spike in production, or a one year contract for a promotional brand, may end up being the lowest cost available for that one year, even if the monthly payment is higher.

3) Speed & Time

Your choice of how to purchase will have a big impact on the speed of implementation of your automation project, and the time period you will be making payments.

  • Straight Purchase and Leasing Options will typically be a longer lead-time than renting.  The equipment you purchase, or lease will be built to your specifications, starting from approving the engineering designs and layout.  And whether you are making lease payments over a 3-to-5-year period or depreciating the equipment over a 5+ year period, your time period for financial impact is long.
  • Rental Options typically have a shorter lead-time.  A rental operator maintains a fleet of equipment, ready for more immediate delivery.  Rental periods are also much shorter than leasing contracts, or capital depreciation schedules.

4) Customization

How much customization is needed for automating your packaging line will have a big impact on our purchasing and financing approach.

  • Straight Purchase and Leasing Options will allow you to fully customize your equipment for the OEM manufacturer.  You either own it on day 1, or you are making a long-term leasing commitment.  This gives you maximum flexibility to specify exactly the features, layout, and configuration you want.
  • The rental business model is based on a rental provider owning a fleet of equipment, readily available for delivery and installation.  Having a standard configuration allows the rental operator to take equipment back when a rental term expires, recondition that equipment, and redeploy that equipment to new customers.  While this may limit your ability to customize, in return you get the benefit of quicker delivery, and more flexible payment terms.

5) Partnering With The Right OEM:

Make sure to include your OEM equipment supplier in the discussion and evaluation of different financing operations.   Keeping your OEM supplier and rental or leasing partner separate can put you in the middle of conflict, or discrepancies in service terms, contract terms, or equipment delivery if the OEM supplier and leasing/rental partner are not aligned.   

Ska Fabricating offers some of the most comprehensive financing options in the world.  This includes relationships with market leading leasing partners who know the equipment, and your industry, allowing for shorter leasing approval cycles.  We recently announced our rental options, leveraging the capabilities of the top automated equipment rental companies to deliver you maximum flexibility and support for balancing cash flow with business expansion. This can even include hybrid options such as Rent to Own, or staggered leasing payment terms, so that your investments in automation generate the maximum return.

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