This article originally appeared in the November/December 2013 print issue of Food Manufacturing.
Whether part of a sound maintenance plan or a larger strategy capitalizing on changing consumer food and packaging preferences, the reality is new equipment acquisitions and production line retooling from time-to-time are essential. From minor upgrades to complex line reconfigurations, here are some tips to help you make your equipment financing a smart investment in a solid future.
Do your homework
Whenever considering a brand new investment or retooling, take a realistic view of the revenue you expect to generate from new customers, new markets, efficiency gains, etc.
While the gluten-free foods industry is rapidly changing and expected to be worth more than $6.6 billion by 2017, the capital spend to isolate your production line and capitalize on the market can be substantial.
Pick the right long-term financial partner
Choose an institution that’s familiar with your industry and offers a diverse array of approaches to helping you lower the cost of acquiring new equipment. Reaching out to your equipment vendor and also conducting a search for a financial partner in your industry on the Equipment Leasing & Finance Association website are a great start.
Ultimately, your financial advisor should be able to understand your cash-flow needs, tax benefits and take an active role in helping you reduce your debt. Picking the right financial partner over the long term is as critical as researching and determining what equipment to buy.
Look for an institution that has affiliation with a deep set of equipment evaluation appraisers capable of assessing the true value of the equipment (asset) anytime over its lifecycle. Such providers may also be able to help you broaden your business network, which can help down the road when looking to sell equipment.
U.S.-based manufacturers are increasingly capitalizing on a strong secondary market for aged equipment in South America. By selling your equipment to the right buyer, you can recoup part of your investment and reinvest in new, more efficient production lines.
Long-term or short-term financing?
Your decision for short or long-term financing will likely depend on the equipment lifecycle and the value of your equipment over its lifecycle.
Financial flexibility is critical. Lines of credit may be ideal initially with any new venture, as it can be difficult to predict market demand and related inventory needs. It is better to remain financially agile in the event demand exceeds expectations.
Consider, too, that the last thing you want to do is lock into an expensive production process without the flexibility to keep pace with rapid changes in technology. Evaluate how many years of true ownership may put your business ahead in profit versus the need to maintain your competitive position from a pricing standpoint and how changes in technology may bring production costs down.
Lease or Buy?
There are a variety of factors to consider when determining whether to lease or buy. A strong financial partner will help you accurately analyze the most cost-effective acquisition strategy through a modeled analysis. However, generally, if you can’t use all the depreciation benefits of equipment ownership to minimize your tax position, or you prefer to upgrade your equipment on a regular basis, you should consider leasing to accomplish these goals.
The food and agribusiness landscape is changing fast. A variety of factors can impact the outcome of your venture, the least of which should be the condition of your equipment or the state of your investment in it. Choosing a financial partner with a thorough understanding of your markets can provide the experience and connections you need to make a sound investment.
Peter Arendt, [email protected], 614-480-3100, is managing director of Food and Agribusiness at Huntington Bank, which specializes in serving businesses engaged in production, processing, and the distribution of food, commodity and agricultural products. Sectors include grain and oilseeds, animal protein, food processing, dairy processing, agriculture inputs and allied industries.