Though leasing has for years been an option for companies in the market for new and used packaging equipment, it has never really staked a significant claim in the industry. Ownership, despite very real risks and drawbacks, brings with it some compelling practical and psychological forces when it comes time to allot money from the capital budget. Leasing�and its hand-in-hand partner, financing�just hasn�t yet acquired the oomph to be a major player in packaging.
But that may be changing, as packaging engineers learn that leasing has its own unique set of compelling advantages. The jury�s still out, but here�s some evidence to consider.
�There are so many reasons for leasing,� says Greg Williams, president/CEO of Danville, Calif.-based American Packaging Capital, Inc., which specializes in leasing packaging equipment and is now the official finance partner of the Packaging Machinery Manufacturers Institute. �It is an effective tool to combat capital budget constraints. And it�s an effective tool to positively impact financial ratios, which we�re all judged on in business.�
The bottom line, then, is that leasing, which can involve renting-to-own, financing or a straightforward usage/payment agreement, can help a company�s � well � bottom line. One reason is that purchased equipment must be listed as an asset on a balance sheet, and must have a corresponding �minus,� a bank loan the company got to finance the acquisition, for example.
Leasing also frees up money from the capital budget�money that, as Williams explains, can be used more effectively in other ways. �When I tell financial professionals that, I always hear the same thing: Silence and, �Yeah, you�re right. Our internal rate of investment is 15 percent.� Well, if my money is costing you 7 percent and your own money is costing you 15 percent, you should employ that money elsewhere. It�s cheaper to use mine.�
Linda Reed, president of U.S. Leasing Corporation in Colleyville, Texas, agrees: �By using our money, the customer�s saving is always higher than the rate in the deal,� she says. �By leasing, the payments are 100 percent expensed out and are reflected on the profit and loss statements of the financials.�
Williams cuts to the chase: �To me, the most important reason [to lease] is, if you can get a piece of equipment in your facility for $1,600 a month versus $82,000, it�s a lot easier, financially, to cut a check on a monthly basis than it is to have a pink slip conveying ownership.�
Regardless of the benefits, it is fair to say that the packaging industry is wary of leasing, or at least hesitant to embrace it as enthusiastically as other segments of the U.S. economy. There are several reasons for this. First, up until December 31, 2004, the government offered a generous depreciation bonus on purchased equipment, in which companies could depreciate up to 50 percent of the equipment�s value. �If you get to accelerate depreciation on a $100,000 piece of equipment,� Williams says, �you�re taking $50,000 of that and offsetting income by that amount. So it�s a way of deferring taxes on income.�
Reed adds, �The depreciation was a big incentive for my clients to purchase in 2004. Most held off for a couple of years to purchase that much-needed equipment until they felt the economy had turned around. With [the depreciation bonus] in place and rates at a 40-plus-year low, there was no reason to wait.�
Purchasing equipment may also be more appealing than leasing if a company is performing well, the economy is stable and there�s money earmarked for spending. After all, if you don�t spend the money when you have the chance, it may be allocated somewhere else and not return in next year�s budget.
A less tangible explanation of why leasing hasn�t taken off in the packaging industry is ownership. There is something to be said for the feeling of pride, satisfaction and prestige that goes along with owning a new piece of machinery.
Paul Burdick, director of marketing and sales for Schneider Packaging Equipment Co. in Brewerton, N.Y., has observed leasing trends for 25 years. And despite seeing the benefits, he has not yet seen the demand.
�There doesn�t seem to be a great deal of desire,� he says, pointing out that his company has offered leasing for years but has had only one taker in the past 24 months. �I get calls from various leasing companies inquiring about our lease-to-own services and wondering if they can partner with us, and I tell them, �It�s something we do offer our customers, but they don�t seem to be demanding the service.��
Burdick speculates that leasing may not be attractive to many companies because their lines demand equipment that�s customized for items with very specific packaging requirements. It�s generally not a plug-and-play business, and if the equipment is �not being used by the customer who bought it, it�s kind of hard to find a fit for it when the lease expires.�
Denise Holloman, director of manufacturing engineering at General Mills in Minneapolis, echoes these sentiments. �I don�t see leasing coming to the forefront of the industry because most of what�s out there is tried-and-true technology. A vanilla machine isn�t going to be of any benefit.�
She also believes leasing doesn�t make much sense if a company and its product line are established. �You might lease while you�re waiting for a new piece of equipment to arrive,� she concedes, �but most times, there�s nothing in it to lease if it�s not a function of your business strategy. I didn�t see what the aura was about [leasing] because it wasn�t a real big question.�
Once the parties have met, they can discuss what best suits the situation, a finance lease or an operating lease.
In a finance lease, which by IRS standards is not technically a lease, the end-user is using the lease as a means to finance the purchase of equipment. End-users assume a relatively high degree of accountability, including maintenance costs, insurance and taxes, as well as being responsible for all bookkeeping related to the lease over its duration.
�A finance lease [is] also called a capital lease,� Williams explains. �It is any lease where there is a bargain or fixed purchase option; it is more of a finance agreement than a true lease. It basically results in the lessee owning the equipment or having the opportunity to own the equipment when the lease expires.�
The lessee must also depreciate the equipment over what the manufacturer identifies as its useful life, which, in packaging, is usually seven years.
An operating lease is a true lease. The contract period is shorter than the life of the equipment, and the lessor must pay all maintenance and servicing costs. It is more flexible than a finance lease and does not have a negative impact on the lessee�s financial ratios.
�The lease payments will show up as a footnote on the financial statements,� Williams says, �but they don�t show up as debt that needs to be recovered.� This kind of off-balance-sheet financing is desirable for companies because it makes them look healthier, more liquid and more profitable.
One last notable characteristic of an operating lease is that it shifts the risks of equipment obsolescence from the lessee to the lessor. Most operating leases are not only short (month-to-month arrangements are not uncommon); they are more flexible in that they often allow the lessee to replace the equipment they originally leased with new machinery shortly after it comes on the market. The lessor will then seek another packager for the older machine.
For their part, lessors seem to be trying to make their services less complicated and more accessible, with some offering virtually instant online approval for transactions less than $100,000, the upper end of the small-ticket market, and only several days� wait for middle-market and big-ticket items, the latter typically defined as equipment costing $1 million or more.
Changes in sales strategies may also entice potential lessees. Some outfits are offering to subsidize end-users� operations in return for business that will increase their market share. For instance, a sales rep for a corrugated packager might say to a company, �Right now you�re giving me 30 percent of your business. Well, give me 60 percent, and I�ll make your lease payment.�
Whether a company is looking to free up money from its capital budget, keep a step ahead of obsolescence or postpone the responsibilities of purchasing equipment, leasing is something to investigate. The practice may not alter the character or landscape of the business, but it is most likely here to stay. As Williams predicts, �Eventually, leasing will become much more prevalent in the [packaging] industry. We feel that it already has and it�s much more acceptable.�
Finance lease: Also called a capital lease, it�s a way to finance the purchase of equipment. The lessee is responsible for certain costs, including maintenance and taxes, and they must do all bookkeeping related to the lease. At the end of the lease, the lessee owns the equipment.
Independent leasing company: Purchases equipment from manufacturers and leases it.
Lease brokers: Coordinate all aspects of the lease, from matching manufacturers with potential lessees to arranging financing terms.
Operating lease: A true lease. The packager must pay all maintenance and service costs. At the end of the lease, the lessee can buy the equipment, return it or lease it again. Payments appear as footnotes on the balance sheet, bolstering the appearance of the lessee�s financial position.
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