Packaging Systems, Inc. offers several alternative purchase options to tailor our customers' equipment requirements to their financial needs.
RENTAL: Providing an affordable solution to short-term production needs, our vast selection of non-custom new and reconditioned packaging machines, are available from our quick-delivery rental program. See our Customer Resource section for a copy of our standard Rental Agreement.
RENT TO PURCHASE: Similar to our standard rental agreement, the Rent to Purchase program allows our rental customers to apply a portion of the rent payments toward the purchase price of the machine. With the ability to exit a machine purchase agreement with no long term commitment, or convert the rental payments into a purchase option, customers can take advantage of the Rent to Purchase option for new product test market launches, restricted capital situations, and production volume increases. See our Customer Resource section for a copy of our standard Rental/Purchase Agreement.
LEASE SERVICES: Packaging Systems, Inc. combines one of the most extensive selections of quality packaging equipment with one of the most flexible and competitive lease programs available in the packaging industry. Typically, lease agreements are available for one year, three year, or five year terms, for new equipment projects ranging in size from one machine to an entire plant. See our Customer Resource section for a copy of our Lease Application.
How Leasing Reduces Project Costs
Use vs. Ownership
The use of equipment is much more important than a document conveying title, as it is the use of the equipment that produces profit - not ownership. Leasing generally results in lower acquisition and operating costs, which implies greater profitability.
Capital Budget Constraints
Operating Leases are funded through a company's Operating Budget, which usually avoids the multi level Capital Budget approval process.
Financial reporting of equipment acquisitions is critical because the equipment must be capitalized as an asset on the Balance Sheet with a corresponding Liability for any debt associated with the transaction. Since the cost of the equipment must be amortized over its economic life, Depreciation Expense will appear on the company's Income Statement. Depreciation and the Interest Expense of the loan represent the Financial Statement cost of purchasing and financing the equipment.
Our leasing program has been designed so that most leases are structured as Operating Leases, with a (defined limit) Purchase Option that conforms to tax code and Financial Accounting Standards Board (FASB) guidelines. Therefore, for financial reporting purposes, the leased equipment is not required to be capitalized; and neither an Asset nor a Liability will appear on the company's Balance Sheet. Certain information concerning the leasing transaction is required to be included in the notes to the financial statements.
This type of "Off Balance Sheet Financing" is attractive for many reasons. Most of the lessee's financial ratios are improved - and since an Operating Lease does not create a liability on the Balance Sheet, the company presents a less leveraged position. An Operating Lease also has a more favorable impact on a lessee's Income Statement in the early years of the lease, because the lease payment expense is less than the depreciation and interest expense for a loan, thus increasing overall reported earnings. The net effect of lowering a company's asset base and increasing reported earnings equals an improved Return on Assets (ROA).
It is also important to note that an Operating Lease conforms with Financial Accounting Standards Board (FASB) and IRS guidelines with respect to the deductibility of the entire monthly payment for federal income tax purposes.
Leasing vs. Cash Purchases
Costs associated with leasing can be measured against a company's Return on Investment (ROI) to determine the relative merits of each strategy. Simply stated, when a company can achieve a greater return on reinvested earnings than the "costs" associated with leasing, then leasing will be more advantageous than using internal funds. Unfortunately, a reliable analysis that recognizes specific financial conditions can prove to be complex and time-consuming. We offer a detailed Lease vs. Buy or Lease vs. Debt Finance analysis to all equipment customers. Our financial models are based upon comparisons of the cash flows resulting from each alternative and the timing of these cash flows. This is accomplished by calculating the present value of the cash flows for each alternative (including the effect of tax credits and the residual value of the equipment) using discount rates provided by the customer. Typically, this is either the cost of capital, ROI; or another rate used to indicate the time value of funds. We separate the two alternatives and present the cash flows that would result in each case.
Traditional financing often covers only 80-90% of equipment cost. Leasing requires only one or two rental payments in advance; and can include all acquisition costs, including operating materials. Retained cash is available for more profitable working capital requirements. Since Operating Leases defer a portion of the total equipment cost to the end of the lease term, monthly payments are more affordable than conventional loan financing.
Negative Impact of Additional Purchases
Recent tax law changes may penalize a company for purchasing equipment. A business that is approaching the Alternative minimum Tax (AMT) or the Mid-Quarter Depreciation Convention will be penalized when purchasing new equipment by having to pay additional taxes due to the loss or reduction in value of certain tax benefits.
Banks often build restrictive loan covenants into business loan agreements, which include current ratio, debt:equity ratio limits, and other minimum measures of profitability. In theory, even a relatively minor technical violation of any of these criteria may influence the lender to request that the loan obligations be repaid or restructured.
Lease agreements do not contain restrictive covenants that can limit a company's decision-making autonomy and independence. A lessor will build its perceived risk into the pricing of the lease and will consider the collateral value of the equipment in its credit decision. Leasing offers greater flexibility and does not restrict the customer's future financing options.
Tax and Accounting Impact
Most federal and state tax statutes are subject to some degree of interpretation. To determine the specific tax and accounting attributes of the attached equipment leasing proposal (and its effect on your business) we recommend that you review this information with your company's CPA or accounting professional.