How smart equipment financing helps packaging operations compete

By Vahram Mergeanian in Automation on November 09, 2018

When it comes to manufacturing packaging for their products, businesses are keenly aware of the importance of using equipment that is up-to-date and in perfect working order. The high precision required to produce efficiently, quickly and with no errors is critical to their overall business plans.

Striking the right balance between investing in the best equipment available—especially in light of increasing technological advances—and maintaining cashflow can sometimes present a challenge.

That said, smart financing strategies for packaging machinery can act as a highly-advantageous tool to help companies preserve cash and enhance the bottom line.   

Based on more than 25 years of experience working closely alongside manufacturers with a range of packaging needs, I’ve compiled our top strategies for today’s businesses to reap the greatest benefit when acquiring their packaging manufacturing equipment:

 

Consider upgrading now to grow and compete

Packaging machinery is naturally used by a range of dynamic industries—food and beverage, healthcare, pharmaceuticals, and many others. These manufacturers understand that the ability to remain competitive and nimble, to adapt to both changing industry standards and business growth, is key.

When looking for efficient ways to meet growth goals, the adage “time is money” could not ring truer. The difference between producing a unit in two seconds versus three seconds can be significant to the bottom line and growth potential.

Small modifications to a production process can make a large impact. Even if current machinery is functioning at acceptable levels, any slowing or downtime for maintenance can cost a manufacturer thousands of dollars.

Thus, upgrading now to newer, advanced packaging manufacturing equipment can prove to be well worth the return on investment.

That said, acquiring the latest-and-greatest equipment generally requires high upfront costs.

The good news is, manufacturers across industries can increase and improve packaging production without interrupting cashflow through strategic financing. This allows equipment costs to be spread out over several months or years—so there is no need to delay upgrades to the “perfect” time.

Further, while the current rising interest rate environment might cause some companies to shy away from financing, the truth is that numbers remain at historic lows. Manufacturers should take a closer look at upgrading and financing—including fixed-rate options—now.

 

Gain additional benefits through smart financing

In addition to improving processes through the cost-effective acquisition of new equipment, the right financing structures can come with the benefits of decreasing the risk of obsolescence and depreciation, as well as preserving the capital that is critical to a company’s smooth operations and growth.

Technology is evolving faster than ever, with certain features—like advanced automation and improved sensors—transforming the packaging manufacturing process. This could leave new equipment purchased now far behind industry standards in just a few years.

Further, the ongoing move toward sustainability, both in the manufacturing process and with the final packaging produced, is another factor that contributes to increasing rates obsolescence.

This also means that the value of today’s equipment depreciates at even faster rates, rendering financing with flexibles terms more important than ever to bottom line—as purchasing equipment outright makes less and less sense.

Smart financing can also help companies of all sizes use improved equipment without tying up capital and better balance their cash outflows and inflows.

For example, through choosing options that greatly reduce upfront equipment costs and offer a manageable payment, businesses can the put more cash into research and development and marketing to build their brands—items that won’t drastically depreciate over time.

 

Understand different lease structures

The right financing solution can vary by company needs and type of equipment. Many manufacturers require a mix of certain core pieces, as well as specialized and customized equipment, for their packaging needs.

For example, we’ve worked with many rapidly-growing businesses that find capital leases—which are essentially lease-to-own structures—highly beneficial for core machinery such as case packing, shrink wrapping and conveyer lines. These pieces typically have a long lifespan relative to higher-tech, customized packaging equipment.

That said, due to significant benefits of efficient equipment, coupled with much faster rates of obsolescence, many companies are increasingly looking to take advantage of operating leases for their more complex pieces—often with terms as short as three to four years.

Operating leases come with the advantages of a “true” lease: a lower monthly payment and the flexibility of the option to defer ownership decisions until end-of-term. Manufacturers can use the equipment and easily hand it back with no strings attached, if it makes more financial sense to upgrade rather than purchase the piece.

For instance, let’s say a company pays $94,000 per month, or $1,128,000 per year, for equipment on a capital lease. Over five years, they will end up spending $5,640,000 over the term for pieces that will likely be close to reaching obsolescence and need to be replaced shortly. With an operating lease, they might pay just $64,000 a month, or $768,000 per year, leaving them with an extra $360,000 a year to put toward their next upgrade and no worries or time spent on disposing of the equipment.

 

The bottom line

Smart manufacturers know the importance of smooth operations in all aspects of business, including packaging production. Delaying equipment upgrades due to high upfront costs, especially within fast-growing industries, can ultimately negatively impact the bottom line. 

Luckily, there are options that allow for manageable payments and seamless, cost-effective upgrades to the newest equipment, when it makes financial sense.

Through educating themselves on not just the different packaging equipment technologies, but the lease structures available, manufacturers can adapt to growth, stay competitive and see the benefit to their bottom lines much sooner. 

Vahram Mergeanian is an account manager at Summit Funding Group, an Ohio-based company that provides equipment lease and finance solutions to businesses across the U.S. and Canada. Founded in 1993, Summit Funding Group has originated more than $3 billion in equipment lease and finance transactions to date. Contact him at [email protected].

 

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Fantastic article, great knowledgeable insight!