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VIDEO: Short term needs for long term equipment?

21 November 2016

In 2002, the average food production contract had a 60 month length. For 5 years, you could build a business model based on the supply, packaging or distribution of food products. And those were clearly the good old days. Increases in automation, something called “big data” around consumer preferences and margin compression across the board have led to a very different business climate. One in which the average contract these days is less than 3 years…and getting shorter. 

In 2002, the average food production contract had a 60 month length. For 5 years, you could build a business model based on the supply, packaging or distribution of food products. And those were clearly the good old days. Increases in automation, something called “big data” around consumer preferences and margin compression across the board have led to a very different business climate. One in which the average contract these days is less than 3 years…and getting shorter. 

How can you equip your company to meet the rapidly changing fads of the food business in the “new normal” of short term contracts that require significant capital to execute?

A CFO of an international food packaging company recently said, “The trend of short term contracts to follow consumer fads severely limits our ability to plan, forecast and manage risk. And those things leave big questions for growth and profitability.” With a number of shorter term contracts, providers have to be more nimble. The same CFO said, “ramping up with major capital expenditures to support short term contracts has left us in situations with surplus staff, equipment and even square footage, while draining cash and credit capacity.”

Equipment can be one of the biggest challenges you face with the shorter term contract. On average, food industry equipment has a life cycle of 72 months. Contracts can require capital investments of £100,000 to £10,000,000 just to begin meeting the conditions of a contract. Gambling six to eight figures of capital or your bank credit capacity on long term equipment for the hopes that the 24 month contract reminds us that…hoping is not a strategy.

Improvise. Overcome. Adapt
It is unlikely that the industry will return to the 5 to 6 year production agreement. It is also unlikely that the pressure on capital to ramp up for new projects will lessen. Unless you do a little improvisation with a renewable rental finance arrangement. What if you could have an 18 month rental for the custom equipment you need to meet the 18 month contract while offering flexible extension terms only activated if the contract renews? Imagine, only paying for the portion of the equipment that is correlated to the contract term. Then…only if you need it…renew for another 18 months or other customised term. And after that…only if you need it…renew for another customised term.

With this solution, if there is a change in or abandonment of the contract, you simply return the equipment to the rental finance agreement provider. You preserve maximum flexibility, enhance cash flows, preserve capital and position your business to win more contracts with a real plan to equip your business for the fads of the food industry.

How can you lose?
EXPENSIVE Equipment may be required to cover a short term commitment or order, say 12, 24 or 36 months, but with the flexibility to extend to longer terms. And when it comes to financial requirements of those equipment needs, CFO’s and Operations Managers often are caught between the short term rental and long term financing. Here’s a solution… http://stltvid.pagedemo.co/

At Somerset, we offer UK-based companies the ability to manage their equipment needs more effectively. For asset requirements starting under £100,000 and reaching beyond £25,000,000 and across a wide variety of industries, we help with creative and flexible financial solutions that reach beyond finance. Let’s talk.


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