Introduction
Investing in an automatic capping machine can significantly enhance efficiency and productivity for businesses in industries ranging from food and beverage to pharmaceuticals or industrial chemicals. However, the upfront cost of acquiring such equipment may be a hurdle for some. Fortunately, there are several financing options available, each with its unique advantages and considerations. In this blog post, we will delve into the world of financing automatic capping equipment, covering loans, capital leases, operating leases, and tax leases.
Loans for Packaging Equipment
Traditional bank loans are a common financing option for businesses looking to acquire automatic cappers. These loans typically offer fixed interest rates and a structured repayment plan over a predetermined period. One of the key advantages of loans is that the equipment is considered a company asset from day one, allowing for greater flexibility in terms of customization and usage as well as the tax benefits of depreciation.
However, it’s important to consider the impact of interest rates on the total cost of the loan, especially as interest rates are expected to remain elevated through 2024. Additionally, loan approval processes may involve credit checks and documentation requirements, making it a more time-consuming option compared to other financing methods.
Capital Leases
Capital leases, also known as finance leases, offer an alternative financing solution for packaging equipment. In a capital lease, the lessee gains almost all the benefits and risks associated with ownership, and the equipment is treated as an asset on the balance sheet. This option often provides more favorable terms than traditional loans and may include lower monthly payments. In a capital lease, the lessee typically has the right to purchase the equipment at the end of the lease term for a pre-determined dollar amount. In most lease scenarios, this option is $1.00 or $101.00.
Businesses opting for capital leases should be aware of potential residual value requirements and the impact on their financial statements. Despite this, capital leases can be an attractive option for those seeking to balance ownership benefits with cost-effectiveness.
Operating Leases
Operating leases offer a more flexible financing arrangement for packaging equipment. In this structure, the lessee does not assume ownership of the equipment and treats lease payments as operational expenses. Operating leases are particularly advantageous for businesses that prefer the latest equipment without the long-term commitment associated with ownership. In an operating lease, the lessee typically has the option to purchase the equipment at the end of the lease term for a pre-determined dollar amount. The lessee may exercise this option (typically 5%-25% of the new equipment value), refinance the lease, or return the equipment to the lessor.
While operating leases provide flexibility and potential cost savings, businesses should carefully evaluate the total cost of the lease over time. Additionally, operating leases may have restrictions on customization or modifications to the equipment.
Tax Leases
Tax leases, also known as true leases or leveraged leases, are structured to provide tax benefits to the lessee. In a tax lease, the lessor retains ownership of the equipment and claims the associated tax benefits, passing on the savings to the lessee in the form of lower lease payments. This financing option can be attractive for businesses seeking tax advantages without committing to ownership. In this arrangement, the lessee has a fair market value (FMV) option at the end of the lease term with the ability to exercise that option, refinance it, or return the equipment to the lessor.
Tax lease arrangements can be complex, and businesses should carefully assess the tax implications and consult with financial experts to ensure compliance with relevant regulations.
Cash Flow Considerations
In all of these arrangements, a primary benefit is that companies avoid a significant upfront cash outlay at the cost of slightly reduced savings over time. Consider the following scenario: A customer anticipates monthly savings from capping automation to be approximately $4000. The cost for a fully customized automatic capper is $50,000. The cost to finance the capping equipment with a 60 month term loan is roughly $1000 per month, meaning the monthly cash savings is reduced to $3000. As you can see by the chart below, although the cash purchaser recognizes enough savings to cover the cost of the equipment within the first year, the cumulative cash flow benefit of a cash purchase does not exceed that of a financed machine until the end of the 4th year of production!
Conclusion
Choosing the right financing option for your capping equipment requires a thorough understanding of the business’s financial goals, cash flow, and long-term objectives. Whether opting for loans, capital leases, operating leases, or tax leases, businesses should carefully evaluate the terms, benefits, and potential risks associated with each option. Additionally, considering the benefits of Section 179 accelerated depreciation in 2024 can further optimize the financial impact of acquiring packaging equipment. By making informed decisions, businesses can unlock the potential for increased efficiency, productivity, and competitiveness in their respective industries
