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Capital Equipment Investment: To Lease or Borrow?

By: James Callari 16. September 2014

 

As the economy continues to improves, more processors are making capital investments to help them expand their current business and/or penetrate new markets. The question becomes, how should they finance this investment? It's a particularly relevant question around when processors start putting together their capital equipment budget for the upcoming year.

 

“When business owners and managers consider acquiring equipment, they often think of their payment option as a ‘lease versus buy’ decision,” states William G. Sutton, CAE, president and CEO, Equipment Leasing and Finance Association. “In any economic environment, when preserving owner or shareholder capital is an important goal, financing equipment through a lease or loan will enable your business to preserve its cash.

 

“Whether you finance equipment through a lease or loan, each has its advantages,” Sutton says. “In evaluating your options, it is important to look at each alternative to determine which will best balance usage, cash flow and your financial objectives.”

 

To help determine the most appropriate option, Sutton has compiled a list of 10 questions processors should ask themselves before proceeding: 

 

1. How long will the equipment be required?

 

“Generally speaking, if the length of time the equipment is expected to be used is short term (which usually means 36 months or less), leasing is likely the preferable option, “ he says. “Equipment expected to be used for longer than three years could be a candidate for either a lease or a loan.”

 

2.  What is the monthly budget for the equipment?

 

“As with any ongoing business expense, consider the monthly cost for a piece of equipment and how it fits into your budget," he states. In general, leasing will provide lower monthly payments.”

 

3. Will the equipment become obsolete while it is still needed for the operation?

 

Sutton notes, “Protection against obsolescence is one of the many benefits of equipment leasing, since the risk of obsolescence is assumed by the lessor. Certain lease financing programs allow for technology upgrades and/or replacements within the term of the lease contract.”

 

4.  Is the equipment going to be used for a specific contract or can it be used for other projects?

 

“Often, the business objective of equipment is for it to be revenue-producing. If a piece of equipment has limited use within a specific contract and won’t be used for other projects, it’s not ideal for it to be idle while you continue to make payments on it,” Sutton explains. “It makes sense to stop the equipment expense when the income from it ceases, which you can do with a lease.”

 

5. How much cash would be required up front for a lease and for a loan?

 

“Leasing can often provide 100% financing of the cost of the equipment as well as the costs for transportation, delivery, installation set-up, testing and training, and other deferred costs (e.g., sales tax),” states Sutton. “Loans usually require a down payment and don’t include the other cost benefits. Ask how much of a down payment is needed and assess the availability and desirability of allocating company capital for that down payment.”

 

6.  Can the company use the depreciation or would the company get a greater benefit from expensing the lease payments?

 

“The tax treatment of the financing arrangement is an important consideration in choosing between a lease and a loan,” Sutton says. “A loan provides you with the depreciation tax benefit; with a lease, the lessor owns the equipment and realizes the tax benefit, which is usually reflected in a lower monthly rent payment for your business as well as the ability to expense the payment. In many instances, if your business cannot use the tax benefit, it makes more sense to lease than to purchase through a loan because you can trade the depreciation to the lessor in exchange for better cash flow.”

 

7. How will a working capital facility be impacted?

 

“Many businesses have an aggregate line of credit through a bank that they can use for inventory purchases, improvements and other capital expenditures,” Sutton elaborates. “Depending on the lending covenants, it is often possible, as well as preferable, to preserve your bank working capital by leasing equipment through an equipment finance provider.”

 

8. How flexible does your business want the financing terms to be?

 

Notes Sutton, “A lease can provide greater flexibility, since it can be structured for a variety of contingencies, whereas with a loan, flexibility is subject to the lender’s rules. If your business has continuing use for the equipment at lease termination, extended rentals, purchase options, trade-ups and return options are available. The lease term allows your business to match all expenses to the term of the equipment’s use, including income tax expense, book expense and cash expense. Most importantly, as mentioned previously, the expense stops when the equipment is no longer required.”

 

9. Do you anticipate the need for additional equipment under your financing agreement?

 

“If your business is planning for growth, you can enter into a master lease that will allow you to acquire multiple pieces of equipment under multiple schedules with the same basic terms and conditions,” Sutton explains. “This provides greater convenience and flexibility than a conditional loan contract, which must be renegotiated for additional equipment acquisitions.”

 

10.   Who can help me evaluate what's best for my business?

 

“Whether you finance equipment through a lease or loan, each has its advantages. When making the decision between a lease and a loan, it is highly recommended that you consult with your accounting professional, as well as draw on the resources of your equipment financing provider to enable you to secure the best possible terms for your lease and/or loan,” Sutton says.

 

These are some of the key considerations that should go into the lease versus loan decision-making process. For a lease/loan comparison and online tools, click here

A True Pioneer Passes

By: James Callari 29. August 2014

 

I was saddened earlier this week to learn of the passing of Frank Nissel, who revolutionized the sheet extrusion business when he co-founded Welex in 1966, and was elected to The Plastics Hall of Fame in 2000 during NPE.  Frank passed away Thursday, Aug. 28. He was 89.

 

I remember the first time I met Frank. It was in 1988. I had just joined the now-defunct Plastics World Magazine as senior editor in charge of reporting on extrusion. I didn’t even know what extrusion was at the time. My boss back then, current plastics blogger Doug Smock, explained it to me this way, to my recollection: “In extrusion, plastic pellets are melted and conveyed by a rotating screw through a die to form a part.” A light bulb went on over my head that would soon be extinguished. I replied, “Oh I get it, so the plastic is somehow colored?” “No,” Doug said. “It’s not d-y-e, it’s d-i-e.” I’m not sure if learning that made matters better or worse in my mind. Was extrusion a process where plastic pellets went to die?

 

So with that “background,” I was soon off to Blue Bell, Pa. to meet this regal, larger-than-life figure that I had heard a little bit about beforehand. I don't know how tall Frank was. Maybe 6 ft or a bit more? But he seemed a lot bigger. When he stood up his back was perfectly straight, his shoulders were thrust back, his shirt was crisp and his suit immaculate. I remember thinking, "This guy is a giant."

 

I was not working on an article about sheet when we met, as I recall; I just wanted to sit down and talk with someone who knew stuff and pick his brain. Pick his brain? Who was I kidding?  I was scared. I knew nothing, didn't even know what questions to ask, and realized I wouldn't understand the answers anyway. And I had heard that Frank, well, could be a bit intimidating and didn't suffer fools gladly.

 

But Frank could not have been more accommodating. He was pleasant, charming, friendly, and funny. Very funny. He called me Mr. Callari, which was disarming and immediately put me at ease. And he was patient. (I came to discover later that he wasn't always patient!) I learned more about his personal trials and tribulations, his outside hobbies and interests, and his opinions about this and that (including plastics magazines and editors) during that meeting than I did about the nuts and bolts of sheet extrusion. But that was more because a lot of the technical stuff he told me went over my head. Somehow he realized that (I guess it was the glazed look in my eyes), teased me about it, waved his hand and suggested that I close my notebook, told me to relax and assured me that at some point sooner or later some of this extrusion mumbo-jumbo would make sense to me (later, as it happens) if I kept at it.

 

One thing I found out soon enough was that a lot of people in a lot of places all over the world had his equipment. "That article you wrote about (so and so)...100% Welex," he'd quip.

 

Over the years, meeting at his office, at trade shows, at SPI/SPE events, Frank and I became friendly. Oh, he'd poke me every now and then about this article or that, but Frank was one of those guys who once he decided he liked you…that was that.  He enjoyed pulling my leg. "What’s new?” he’d ponder, repeating my question. “We painted our machines a different color. Write about that.” But he was truly a font of information about anything related to polymers and processing, and not just extrusion either. "I read that article you wrote last month," he'd say. "That (whatever) that you reported was new is actually about 25 years' old. It didn't work then, it won't now."

 

Excuse the cliches, but Frank was in no uncertain terms an industry icon, a legend, a pioneer, a giant, an immortal. Frank was to the world of extrusion what Robert Schad has been to the world of injection molding. Now, if God has any questions about seven-layer sheet extrusion for thermoforming drinking cups, he knows who to ask. Heck, they might be stringing up a line now.

New Guide Offers Tips on Speeding Changeovers

By: James Callari 27. August 2014

 

Time, as the old adage goes, is money. This is certainly true for custom processors, who in large part are able to pay their bills based on how quickly they are able to transition from one job to the next. It makes no difference whether you are involved in injection molding, extrusion, blow molding or any other process; you don't make money if your not making parts.

 

There’s some help along the way. Check out  How to Reduce Changeover Time and Increase Throughput, available on line from Polymer Ohio and its subsidiary, OH!Manufacturing.

 

Does $1.8 million sound like a lot of cash. According to the guide, that's what it costs for a one-hour daily changeover on a fairly significant packaging project with the line running 240 days per year. Many manufacturers don’t even realize how much money is slipping out the door because they aren’t measuring properly. Maybe there are techniques where you can cut that time in half.

 

Can you improve your changeover procedures? Click here and download the PDF.

First-Ever Conference Planned on Conformal Cooling

By: James Callari 22. August 2014

Robert A. Beard & Associates, Inc. a well-known provider of technical, engineering and management support for plastics and Plastic Technologies, Inc. (PTI), a global leader in plastic-based package development is announcing the inaugural 2014 Conformal Cooling Conference.

 

The conference, Injection Molding Technology for Increased Efficiency and Profitability,  is aimed at helping OEMs, injection molders, and moldmakers to learn more about the advantages of conformal cooling.

 

The event will take place on Wednesday, September 17, 2014 at Automation Alley, Troy, Mich. Fees are $ 495.00, which includes lunch and any conference related materials. The session will begin 8:30 AM, with registration open at 8:00 AM.

 

Beard calls conformal cooling of injection molds "a game changer in the molding industry." Typical cycle reductions of 20% - 40% can be realized, lower reject rates are accomplished because of uniform cooling and stronger parts are achieved through lower molded-in stress.

 

“This technology accelerates the speed of heat transfer and does so more evenly on curved and complex geometry than with conventional molds. This results in improved quality and increased profitability,” states Beard. Click here for an article Beard wrote on the subject in the June 2014 issue of Plastics Technology.

 

Presentations will include:

 

  • Jeff Higgins, Moldflow Corp.: The Design & Analysis of Conformal Cooling Channels.

 

  • Reiner Westoff, Contura MTC GmbH: Vacuum Brazed Conformal Cooled Molds and  Rapid Heat Rapid Cool Process.

 

  • Augustin Niavas, EOS GmbH: Direct Metal Laser Sintering DMLS.

 

  • Doug Hepler, Polyshot: Vacuum Brazed Hot Runner Manifolds and Design Guide For Conformal Cooled Molds.

 

  • Barry Sutherland, North Coast Industrial Imaging: Technologies & Techniques For Troubleshooting Conformal Cooled Molds.

 

Report: Packaging Still Growing

By: James Callari 13. August 2014

 

Some have suggested that packaging is virtually recession-proof because of its connection to food. The Great Recession proved that might not be exactly true, but the contract packaging business still seems like a good market in which to stake a claim.

 

The third edition of the Contract Packaging Association's  The State of the Contract Packaging Industry revealed that: 

 

  • Since 2008, the contract packaging industry has more than doubled in growth.
  • The most prolific industry segments served by the contract packaging industry are food and beverage, but the personal care and pharmaceutical industries are poised for extensive growth through 2018.
  • Since 2008, the contract packaging industry has moved toward a workforce of full-time employees as opposed to using temporary labor yet the Affordable Care Act (ACA) may have a major impact on companies providing employee healthcare.

To ensure the confidentiality of those who participated in the report, the Contract Packaging Association secured the services of SAI Industrial LLC, the independent research firm, which conducted the research for the two previous studies.

 

For questions about the study email Mary Von Qualen




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