Is Leasing Equipment a Good Solution For My Business?

You’ve got business coming in and a big contract is in the hopper. Your pipeline is full but you’re concerned that you may need some extra equipment to handle the workload…

To grow and expand the capabilities of your company or to maintain your existing fleet of vehicles, such as tractor/trailers or heavy equipment, you’ve determined that it’s time to bring in more machines.

Now that you’ve established your need, how do you decide whether it’s best to buy or lease equipment and tractor/trailers or to rent what you need?

With pros and cons to each option, it pays to evaluate your company’s current situation and bandwidth, your future plans, and carefully consider which method (or methods) of acquiring equipment will be most advantageous to your business. Initial cost, while important, is not the only factor in play…

The first things to consider are how often the piece of equipment will be used, how urgent and persistent your need, and your cash flow situation. Taking a look at your current workload and your projected future needs is a solid place to start. If your need is one-time and urgent it could make sense to rent equipment for the project. If you will be using the same equipment repeatedly over time, then it would make more sense to lease (we don’t recommend buying outright - we’ll explain). Other factors to consider include associated costs; delivery of your equipment, repairs and maintenance, working capital, depreciation, and resale value, which are all relevant to your decision.

Things to consider when figuring out the best path to equipping your company:

1. Financial Situation - Present and Future

Do you currently have the capital to buy? Even if you do, is purchasing equipment the best use you can make of that capital? Is tying it up in equipment going to affect other areas of your operation? We have found that businesses which use cash to purchase equipment, in many cases, do not plan adequately and soon afterwards they start looking for expensive merchant cash advances to pay for daily, weekly, and monthly operating costs! Vendors go unpaid, taxes come up, marketing goes down, some cannot make payroll.

Can you get access to credit, loans, or a leasing program? Is renting a better option for now? Renting is always a good solution for short term projects of up to 6 months or so, provided the same equipment won't be needed again soon. Of course, you should look deeper than your current situation and project your costs over several months or even years. Buying usually requires a larger one-time financial outlay, renting is less expensive up front but the cost can add up quickly, and leasing is a viable alternative that has benefits worth investigating.

2. Length of Project or Frequency of Need

If you have a short-term job or you need a specialized piece of equipment for a one-time project, renting may be the best option. However, if the machine isn’t going to be used for the entire time it’s rented (due to changes in the project schedule or unforeseen hold-ups), then you’re spending money on a machine that’s sitting and waiting, not making you money. 

If you’re working on a long project or if you’ve got several jobs on the horizon, then leasing probably makes better sense. Unlike specialized equipment, multi-purpose pieces of equipment (loaders, excavators, backhoes, forklifts, trucks etc.) can be used for various projects are generally great assets on job-sites.

3. Equipment Usage and Availability

Owning your own equipment means that you have unrestricted use (aside from time needed for maintenance and repairs). Your company can be nimble, reacting quickly to unexpected changes in projects or project schedules. Agile companies can take on jobs with less restriction and complete projects with minimal downtime. By leasing to own, you can pay off your equipment without the large outlay of cash up front. Once you own your equipment outright you can use the equity in the equipment to obtain working capital, if needed, by way of a “sale leaseback’ program.

Before you decide whether to rent, buy, or lease you should weigh the potential risk of a rental company not having the machine you need when you need it. Owning your own equipment can be an influencing factor for potential customers when they are choosing a company for their project. Being properly equipped to take on their job can project the image of a stable, trustworthy business.

4. Cost of Ownership vs Cost of Renting

Ownership comes with maintenance and operating costs, insurance, fees, and these costs vary from machine to machine. Renting typically presented as an inclusive cost and your rental fees will include the purchase price and the cost of ownership, both marked up to profit the rental company. You will also likely have to provide delivery of your rental equipment for each usage.

Why Take a Good Look at Your Leasing Options?

Your revenue isn’t generated by your owning the equipment, but by your using it. When you lease, you pay only a portion of the equipment’s total value, tied only to the time during which you are using it. When you buy equipment (using all cash), you incur the cost of the full value up front, regardless of how long you plan to use it or keep it. Equipment leasing can conserve cash flow and improve your bottom-line performance.

Leasing can also be used as a tax strategy.

Fair Market Value (FMV) Leases (Also Called True Leases)

Fair Market Value leases allow businesses to take advantage of the tax benefits of ownership. You can deduct the lease payments as an operating expense from ordinary income taxes.

$1.00 Buy Out Leases (Also called Capital Leases)

$1.00 Buy Out leases are offered at a fixed rate with their monthly payment higher than a FMV Lease and is used by a business owner wanting to own the equipment at the end of the lease for $1.00. Additionally, you retain depreciation benefits.

There are many factors to consider when you’re in need of more equipment to grow your business. Knowing all your options before you get started gives you more control over your fleet and your finances. Before you buy your next machine, make sure to get all the information you need to make an informed choice.

Have questions about how leasing could work for your business? Call us at (817) 479-3602 or schedule a call at https://www.bentwoodfinancial.com/contact

*The content of this page is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service, nor to offer any tax, legal, or financial advice. Be sure to consult your own accountant or tax advisor regarding the tax consequences of your leasing and financing transactions.*