Purchase Options
The Big Question: Rent, Lease or Buy
You’ve been awarded a project and have determined that you need to acquire new equipment to get the job done. You have several options to consider: Do you want to purchase that piece of equipment, and if so, should you buy it new, or would a used machine get the job done? You’ve heard there is a rising trend of renting construction equipment and are wondering if that is something to consider. Should you consider leasing your excavator or wheel loader? To make the decision that’s right for you, ask yourself the following questions.
Is my company in the black or the red?
Smart business owners understand their financial profiles at any given time. What do you see on your balance sheet? How do your liabilities compare to your assets? If you aren’t currently profitable or if you don’t have the capital for a down payment, purchasing a piece of equipment may not make sense financially.
Will I be borrowing money any time soon?
If you already have an approved line of credit with a financial institution that covers the purchase, buying a piece of equipment makes sense. If you don’t, or if you know that you have plans in the next 12 months to borrow money for another purpose, leasing may be the best choice. When you lease, that transaction takes place off your balance sheet and won’t appear as a liability.
How much will this piece of equipment be used?
Some industry experts suggest you purchase a piece of equipment only if it’s going to be on the job 60 to 70 percent of the time. Take a realistic look at the projects you have and expect to get in the next 12 to 24 months. If you feel comfortable that your new excavator or wheel loader is going to be hard at work at least 30 to 35 weeks out of the next 12 months, you’ll likely be generating enough revenue to pay for that investment.
How do the options affect my tax liability?
This should be discussed with an accountant or financial planner who knows your company inside out. In general, with a rented machine, you can expense your monthly payments on your income statement. You can also deduct lease payments as an operating expense. But, if you purchase the equipment and finance it, only the interest portion of your monthly payments can be entered as an expense item on your income statement.
You can also depreciate a purchased piece of equipment. For example, if you buy a piece of equipment for $50,000, the government allows you to depreciate $25,000 in December of the calendar year you purchased the machine, which reduces your tax liability.
Which option will allow me to obtain the lowest monthly payment?
That will often depend on the financial institution you choose to help you purchase your equipment. Leasing has attractive benefits, such as giving you a way to save capital and earmark it for other expenses. Plus, sometimes leasing companies will offer you flexible, seasonal payment schedules so you can make higher payments during high-revenue months and lower payments during slower months. However, for that flexibility, you will often have to pay a higher interest rate than if you were borrowing money from a bank.
If you purchase a piece of equipment and finance it, you typically will have 60 months to pay off the loan, resulting in a smaller monthly payment compared to some other options. Again, this only makes sense if you have enough long-term business to justify the purchase.
When you rent a piece of equipment, you pay only for the months that you use the equipment. If a customer awards you a contract that will last six months and you don’t have a guarantee that you’ll follow that project with another one requiring similar equipment, renting is your best solution. Plus, you may be able to charge your customer enough to cover, or even exceed, your monthly rental payments if you are renting that machine specifically for a customer’s project.
What if I rent my excavator or wheel loader and my six-month project turns into a 16-month project?
Many dealers offer rent-to-purchase solutions. If there is a chance that the job could go significantly beyond its originally determined schedule, that’s a good question to ask a dealer or rental company. In rent-to-purchase scenarios, the dealer will credit your rent payments toward the purchase price.
If I have a favorite brand of equipment, does that affect my decision to rent, purchase or lease?
Most contractors who are renting equipment aren’t focused on a specific brand or manufacturer. They have a project that requires a short-term large equipment solution, and they want a piece of equipment that works and will get the job done. Sticking with a brand you know and a company you trust is more important with an acquisition. When you purchase, you want to go with a manufacturer that has a good warranty and a strong commitment to parts and service.
I’ve decided to make a purchase, but there are so many brands on the market. Any tips?
Most machines are going to be similar on the spec charts since many manufacturers use the same parts suppliers. You need to look past the specs. Warranties, parts availability, after-sales support, price and dealer networks are important considerations on new machine purchases. Manufacturing companies are constantly changing offerings to meet market demand and stand apart from the crowd. Extended warranties, multiple power modes, satellite communication systems and computerized fleet maintenance systems are some of the new features that manufacturers offer to provide better value.
Convenience and comfort of the operator also are important differentiating factors. Keep an eye out for features including fully adjustable seats and armrests, large foot pedals, ergonomic joysticks, storage space, LCD monitor control, safety glass and automatic climate control. It’s important to look for models in which these features and benefits come standard.
Are there any warning signs to look for when purchasing used equipment?
It is difficult to quantify how a machine has been operated and maintained. Walk around the machine, look for signs of abuse and misuse, such as dents, scrapes, oil leaks and missing parts, and listen for unusual noise. It is also a good idea to check hydraulic system pressures and compare with new machine specs.
Is there an optimal time of year to buy?
Many business owners wait until the end of the year to buy. They do this for a few reasons. Sometimes in quarter four, manufacturers are motivated to unload inventory, which can result in discounts. Also, if a contractor has had a profitable year and has a need for a particular machine, an end-of-year purchase will reduce taxable income. But, don’t splurge just because it’s the end of the year.
Article courtesy of Construction Business Owner
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