For many contractors, construction equipment represents their largest expense in terms of (nonhuman) assets. As such, the machinery you use can either help your bottom line by making your workforce more productive or hurt it by drawing away dollars unnecessarily. So it’s important to regularly revisit that classic construction quandary: Should we buy, lease or rent our equipment?
If you use your equipment at or near maximum capacity and maintain that level of use, buying may be your most logical choice. However, keep in mind that, while you may use your equipment extensively during peak times, it may be difficult to maintain that level of use every day.
Many contractors like the idea of owning equipment because they can deduct the related depreciation, insurance, repairs, taxes and interest, which lowers their tax bills. Large down payments, however, can strain your resources. Also consider what your business could do with that capital if the money were directed elsewhere.
In addition, buying means you’ll have storage and transportation costs. And, you must deal with disposing of the equipment once it has outlived its usefulness.
Many contractors lease their equipment to conserve capital. If you’d rather allocate money toward salaries or growing your company, for example, leasing offers a good alternative to buying.
Equipment leasing is essentially a loan. The lender buys and owns the equipment and then leases it at a flat monthly rate for a set number of months. At the end of the lease, you have the option to purchase the equipment, return it or lease new equipment.
Many leasing companies offer flexible payments that can help contractors and other seasonal businesses better manage their payments during busy months and allow no payments during slow periods. Because payments are fixed for a set period, you can knowledgeably budget into the future.
Most leases are structured so that payments are made with operating rather than capital funds, which can eliminate or reduce capital budget delays. As an additional benefit, you can usually deduct monthly payments as an operating expense.
There’s a downside, however. If you go the leasing route, you’ll likely pay higher interest rates than what you’d pay on a bank loan to actually purchase the equipment outright.
Smaller construction companies often can’t afford to own every piece of equipment they need, but they can’t afford to be without them either. So a big advantage to renting equipment is that you pay for it only when you use it. You can always return the equipment to the rental company if business slows down or if a project falls through.
Equipment rental offers many of the same benefits as leasing, with three distinct differences. First, rental contract periods provide total flexibility. Equipment can be rented for any length of time — for example, from one day to as long as one year. Second, rental equipment usually includes maintenance provisions. And, third, if you don’t like how a rental operates after actually using it, you can return the item. You’re not locked into a long-term commitment.
Renting also gives you convenient access to the newest and best equipment. Rental companies typically upgrade their inventories regularly. They also provide specialized mechanics to keep their pieces in top condition. A larger rental company may even be able to dispatch a mechanic to your project site quickly or, if necessary, deliver a replacement piece of equipment.
Finally, renting simplifies your budgeting and accounting because it greatly reduces paperwork and administrative requirements. There’s only one invoice — and one cost — to account for. And remember, rental expenses may be deducted as a business expense.
All of the Above
So what’s the right answer to the buy, lease or rent conundrum? Probably “all of the above.” Some combination of renting, leasing and buying may allow your construction company to meet both its short- and long-term equipment needs. Determining the right mix, however, requires careful evaluation of your needs and financial situation.
Please contact BeachFleischman so that we can assist you in making the right decision. We help contractors all over Tucson and Phoenix Arizona (AZ).