Cash or Loan? How best to acquire new food packaging technology

food equipment

The biggest challenge facing the food manufacturing industry is responding to demands to move away from the historic reliance on plastic packaging. The introduction of biobased and biodegradable alternatives mean that new types of packaging will require changes to the food manufacturing process and the introduction of new technology.

A rapid, consumer driven reduction in the use of plastic will almost certainly result in an urgent need to maximise productivity. This means increasing or maintaining output without a corresponding increase in cost or decrease in quality. It is in the quest for improved productivity that investing in new technology becomes essential.

The use of robots that take full advantage of improving artificial intelligence are being introduced to areas of food packaging and distribution. The online grocery retailer Ocado offers an excellent example of how robots can complement humans to provide a highly efficient warehousing and logistical solution. And smart packaging involving the use of sensors within packaging is increasingly being used to monitor the state of food being stored, thereby reducing both waste and the risk to health.

A question often raised is whether it is better for food manufacturers and processors to use a bank loan or to take out some form of leasing agreement to fund the acquisition of new capital equipment.

It’s first worth exploring the fundamental difference between these two popular sources of credit. Essentially with a loan the user borrows money on pre-agreed terms to purchase the equipment required. With a lease, ownership of the equipment resides with the leasing company and payment is made for the right to use that equipment over an agreed period of time. With one type of lease, Hire Purchase, the user can take ownership once all payments have been made, but not before.

If payment for use rather than outright ownership is a favoured option, then an operating lease is likely to provide a cheaper option than a loan for the period of time the equipment is being used. This is because once an agreement ends the equipment is handed back for the leasing company to sell, and that anticipated selling price is used to reduce rental payments during the lease. Leasing companies are specialists in their chosen markets and understand fully how to re-market the equipment they finance.

A finance lease or hire purchase agreement will enable a food manufacturer or processor to have use of equipment for its full economic life.  In the case of hire purchase, ownership of the equipment will pass once all payments have been made. The sum of payments made will exceed the purchase price of the equipment and any user would need to do their own research to establish respective costs. One factor that might also need to be taken into account is that the price of a lease is fixed at the outset whereas the cost of a bank loan is normally tied to the Bank of England base rate and as such subject to change.

Factors other than cost should also be considered in deciding whether a lease or a loan is the most suitable source of credit, for instance if a user wanted an agreement that included the provision of service and maintenance as well as payments for equipment, contract hire agreements offering such a facility are often available from leasing companies.

A key question to ask before taking any decision to buy equipment using a bank credit line is whether that credit line might be needed for other purposes such as funding business expansion, acquiring another business or to finance a period of negative cash flow. If in doubt it is probably as well to take out a lease to fund capital equipment investment and keep existing credit lines fully open.

The need to increase productivity and take advantage of the raft of new technology becoming available involves acquiring new capital equipment. The good news is that leasing allows such investment to take place now whilst spreading the cost and keeping existing credit lines fully intact.

There are different types of leasing agreement available depending on user requirements as well as a high degree of flexibility with regard to terms and payment profiles. This means that just about any budget constraint can be overcome and food manufacturers and distributors provided with the funding required to achieve the necessary productivity gains.

Andy MilsomAndy Milsom, Head of Partner Training & Development at BNP Paribas Leasing Solutions



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