Meat + Poultry - October 2004 - 46

Equipment

Lea$ing benefit$
* Leasing enables operators to pay for equipment as they
use it.

* Leases can be negotiated to include installation, maintenance
and performance.

* Monthly payments are usually fixed for the entire term of the
lease, making forecasting easier.

* Equipment leasing companies tend to be easier and quicker
to work with than traditional lenders.

* Longer terms are available for leases than for traditional
financing.

* Purchase options can be negotiated at the end of the term or
a new lease on upgraded equipment can be signed.

* Most equipment becomes obsolete before it is paid for.

* Frees up cash for operating improvements in other areas of
the plant.

* Down payments aren't necessarily required.

* Leasing preserves a company's line of credit.

equipment leases make sense. Similar to an automobile lease, plant
operators can construct lease agreements that put the burden of
maintenance and performance on the equipment manufacturer.
Many processors opt for either a capital lease or an operating
lease. Under a capital lease, a meat company would make monthly payments and usually has the option to buy the equipment at the
end of the term. Equipment users like this arrangement because little
or no initial investment is required and at tax time the processor can
treat the investment as though it were actually purchased and realize
some depreciation benefits.
Operating leases, on the other hand, appeal to companies not
wanting their financial statement to include a pricey piece of equipment. Monthly payments are typically less than capital leases and
funds come out of a company's operating budget. Processors need
to be able to respond to their customers' requests quickly and realize
if they aren't equipped with the tools to meet manufacturing specifications, a competitor will.
For some processors, financing options are never considered.
One East Coast meat processor, whose company's annual revenues are just under $40 million, says leases don't offer his business
much. "I don't usually do leases," he said earlier this month during the
American Meat Institute's Innovation Showcase. The processor says
his most expensive equipment tends to be the packaging machines,
which can easily cost $150,000 to $200,000 each. But, he says, "Why
should I lease if I can pay cash?"
Other processors' cash flows make leasing a favorable option. Gary

MEAT&POULTRY

Skiba, president of Redmond, Wash.-based Scandia Capital Group,
says once processors are shown the financial benefits of leasing, few
disagree that it makes sense. "Using leasing options as a financial tool
is an often misunderstood concept for businesses in the food processing industry," he says. "The biggest hurdle to successfully understanding these options is the mystery of financing."
Officials with FMC FoodTech, Chicago, say many of their customers have begun asking for financing options. The company has responded by offering operating leases with a lease-own option. FMC
has partnered with Scandia Capital, because of their familiarity with
equipment manufacturers and the meat processing industry. The financing company works only in the food and packaging industries,
which, according to officials, gives them an advantage when customers need financing in a hurry and with terms that are flexible.
"Scandia has always been able to provide terms when other institutions weren't willing to risk the money," says Ted Baldwin, vice
president of FMC's R&D and marketing. FMC's lease-own program
has been offered for less than two years and is quickly becoming a
more popular option.
FMC currently has 14 operating lease agreements with processors in the U.S., including with "the largest further processors" of
poultry. "Most of the leases have been signed in the past six months,"
says Baldwin.
Under the agreements, processors pay incremental fees for the
equipment and can structure agreements that limit their risk to varying degrees. The operating leases are flexible and can be tweaked
to fit a customer's needs. "We give them the right to use our
equipment, the right to spare parts, access to service technicians and, in some cases, performance
guarantees," Baldwin says. "And they
have the option to buy the equipment at
any time during the lease."
With more sophisticated, precision equipment, such as FMC's line of water-jet portioners,
customers benefit from a cost standpoint. More importantly, the buyers of equipment with six-figure price tags want to get the
most out of the machine's service life. Untrained maintenance workers
can compromise the life of the equipment. "Often the portioner is the
most sophisticated piece of equipment in the plant," says Baldwin. "The

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Meat + Poultry - October 2004

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