Purchasing new packaging equipment can take a big chunk out of your capital budget. Like it or not, the modern state of packaging dictates that you keep up with technological advances in equipment. Frequent improvements in machinery reflect today's incessant product and packaging changes, as well as the persistent need to raise productivity and line speeds.

That doesn't mean you can't tweak old machinery to keep up--you can. But inevitable equipment obsolescence or breakdowns are somewhere on the horizon and eventually you'll have to buy a new machine. It's in the financing arena that battle lines are likely to be drawn--a conflict nearly Shakespearean in scope.

To lease or not to lease? That is the question (with apologies to Hamlet)--especially when it comes to procuring new packaging equipment. Maybe your company is large enough--profitable enough--to be able to afford buying a new piece of equipment outright.

But maybe you've overshot your capital budget allotment and can't spare the hard cash for a machine that you desperately need. Or maybe you're a start-up or a "mom-and-pop" operation and you need a new filler, bagger or cartoner to boost your packaging line but budget constraints simply make cutting a check out of the question.

According to Greg Williams, CEO of American Packaging Capital--a company that specializes in leasing packaging equipment and has recently been appointed the official equipment finance partner by the Packaging Machinery Manufacturers Institute (PMMI)--if there's a lot of capital available, buying equipment is probably the way to go. If you don't spend an allotted amount of capital during the course of a fiscal year, you won't get it next year.

Explains Williams, "The assumption is, if the company is growing, if the economy is doing well and there's money--you need to spend it because, if you don't, it'll go somewhere else. So the impetus is to buy that piece of packaging machinery now while there's a chance. Use it or lose it, in other words. Plus there are psychological reasons to obtaining a pink slip. Ownership sometimes factors in more so than equipment obsolescence."

When a business buys equipment, it capitalizes it on its balance sheet by showing the equipment as an asset. And the company must also include a corresponding liability to account for any loans used to finance the transaction. The cost of the capitalized equipment must be amortized over its economic life and depreciation expense will appear on the company's income statement. The depreciation and interest expenses represent the financial statement cost of purchasing and financing the equipment.

But packages change, technologies change and, therefore, equipment must change--sometimes before the depreciation period is up--which makes leasing an attractive alternative.

Leasing might also help stretch your budget dollars. By making "affordable" lease payments over a period of time, you [night be able to buy "more" packaging equipment, either in numbers (like two machines instead of one) or in sophistication (like ordering servos and the latest controls).

Types of leases

Leasing equipment has been gaining more ground in the packaging industry as end users become more familiar with how a lease works and what the benefits are. There are two programs available: the finance lease and the operating lease.

* The Finance Lease:

Commercial banks and equipment leasing companies are common dealers of the finance lease. Instead of a firm being saddled with raising the money for the acquisition of a capital item, the lessor purchases the item, permits its use by the lessee and is repaid by the lessee through monthly or annual rental fees. The lessee assumes service and maintenance costs plus keeps track of any related bookkeeping over the duration of the lease.

Unless the lessee has an option to buy, the leased item goes back to the lessor when the lease expires. Many leasing companies join with equipment manufacturers in setting up a joint venture subsidiary to buy equipment and lease to packaging machinery end users. The key to this type of lease is that it shifts the burden of capital accumulation from the lessee to the lessor.