Equipment acquisition can be one of the most costly business expenses for food manufacturers, and one that can have a deep impact on profitability.
Food Manufacturing recently interviewed Eric Freeman, Vice President of Summit Funding Group — an Ohio-based company that provides equipment lease and finance solutions to businesses across the U.S. and Canada — to find out what strategies food manufacturers across the U.S. are implementing in order to save costs and boost profits.
Food Manufacturing: What should food manufacturing companies know about equipment acquisition in today’s market climate?
Freeman: Most owners and CFO’s know that food manufacturing is a low margin and highly competitive business. To stay in the game, companies must keep operating costs as low as possible in order to maximize profits. Strategic equipment acquisition is a major part of this strategy.
Having the right equipment on hand, with the right financing in place, can have a tremendous impact on a company’s bottom line.
Overall, food manufacturers will need to upgrade or replace their equipment every 5 to 10 years in order to remain competitive. And the truth is, replacing outdated equipment can be costly if not financed correctly.
That said, managing the equipment acquisition process in the most efficient and cost effective way possible is crucial to running a successful and profitable operation.
FM: What role has equipment played in recent years in terms of food manufacturers’ profitability?
Freeman: Equipment is essential to a food manufacturer’s operations and profitability, and its role has increased in importance over the past decade. A major reason for this shift is rapidly changing technology.
Many new technologies offer deep benefits to food manufacturers, providing companies with new ways to save energy and increase efficiency. As equipment technologies evolve, the role of equipment in the food manufacturing industry will continue to increase in importance.
One area where this trend is most evident is in the energy sector. Because energy is such a massive expense for manufacturing companies, installing energy-efficient lighting, solar power, fuel cells, etc. can provide serious savings in terms of long term operating costs, and as a result, can increase profits. With the ever-present risk of blackouts and the sheer cost of power inevitably rising, companies are increasingly moving toward the acquisition of energy efficient-equipment upgrades in today’s market.
FM: As companies embrace energy-efficient equipment, what are you seeing in terms of demand for new equipment?
Freeman: Demand is definitely rising. Many of our manufacturing clients are upgrading their facilities with simple items such as LED and timed lighting. In addition, solar and fuel cell projects have become extremely popular.
Fueling the demand for this type of equipment is electrical cost savings, which is astronomical for food manufacturers that utilize a substantial amount of power to run their plants.
The fact is, the use of fuel cells, solar, or other alternative energy sources allows manufacturers to create consistency in their monthly energy costs. Because the energy is coming from the energy-efficient equipment instead of an outside company, there is no fluctuation in cost. Instead, the food manufacturer’s energy cost becomes a part of its monthly equipment payment.
For example, we had a food manufacturing client who had been paying an average electricity bill of about $15,000 per month. The company decided to lease a fuel cell system with a lease payment of approximately $12,000 per month. The company immediately saved $3,000 per month in electricity costs. Furthermore, this savings will only increase as the cost of electricity inevitably increases overtime.
This strategy ultimately allows operators to better budget their monthly operating costs. The savings can typically be reflected quickly in a company’s bottom line, making energy-efficient equipment upgrades very advantageous and thus, highly in demand.
FM: What finance options do companies have when seeking new equipment?
Freeman: The finance options are virtually endless when it comes to acquiring new equipment. Leasing is certainly the most popular and arguably the most advantageous option, as it provides so much flexibility and range in terms of structure. Leasing also allows companies to spread the cost of equipment out over several years, rather than paying a hefty price tag on a piece of equipment up front, and parting with precious cash.
Depending on the lease structure secured, at the end of a lease, a borrower can have the option to either buy the equipment or return it to their lessor.
In the current market, as advances in technology continue to increase, the frequency in which manufacturers will need to replace their equipment will also rise. Because of this, leasing will likely continue to emerge as the top finance option for food manufacturing equipment.
FM: What leasing structure would you recommend to a company?
Freeman: The specific lease structure certainly depends on the customer and the specific equipment, so the best financing will vary depending on the situation.
That said, because most manufacturing equipment lasts an average of 10 years, a capital lease is usually the best choice. This structure functions much like a traditional purchase, as it allows the company to own the equipment at the conclusion of the lease for a nominal purchase price, generally $1.00. However, unlike a traditional cash purchase, the cost of the equipment is spread out over several years, allowing the company to hold onto its cash with the lessor financing 100% of the equipment and even installation costs.
On the other side of the coin, operating leases are also an option to consider. In an operating lease, a food manufacturer will still reap the benefits of holding onto its cash by spreading payments out over time but, with this lease structure, the company can actually return the leased equipment when the lease ends, in the event there is new technology available or if the contract the equipment was acquired for is not renewed.
With that in mind, an operating lease structure is perfect for equipment that needs to be replaced more frequently, such as very technical equipment that outdates quickly due to updates in technology. Operating leases are also excellent choices for facilities that are focused on staying competitive by being able to continually upgrade with the latest and greatest equipment. Finally, this lease structure is an ideal fit for equipment that will only be utilized for a specific contract that a food manufacturer may have secured, allowing the company to return the equipment at the end of the contract after only paying a portion of the acquisition cost.
FM: What advice would you give food manufacturers looking to acquire new equipment?
Freeman: My primary piece of advice is to find the right financing for your company’s specific situation, and more importantly, for the specific equipment you need.
Food manufacturers should be aware that there are a plethora of finance structures available, and they should seek out a finance partner that can customize solutions to meet their needs rather than big banks which typically utilize a “one-size-fits-all” approach when it comes to financing equipment. If an equipment finance provider only offers a few select structures, then food manufacturers might find themselves unable to benefit from the cost savings that could be available to them with more tailored solutions.
Another point to keep in mind is the substantial costs associated with setting up new equipment. In order to save upfront costs, food manufacturers should seek out an equipment finance provider that will also handle vendor and progress payments associated with the delivery, installation, and even the inspection of any new equipment. While some finance providers will offer to reimburse their clients after the fact, a smart food manufacturer will seek out someone who will make the payments for them and work those costs into their monthly lease payment.
Overall, it’s good for food manufacturers to know their options, and make strategic decisions when acquiring and replacing equipment. Ultimately, those who do so will reap substantial bottom line benefits.
Eric Freeman is Vice President of 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 $2 billion in equipment lease and finance transactions to date. Freeman has more than 12 years of experience in equipment finance and has completed billions of dollars in financing transactions throughout his career. Contact him at firstname.lastname@example.org