Compact Excavator Acquisition is No Small Choice

by Becky Schultz
Created: August 20, 2012

When it comes to compact excavators, the decision to buy, rent or lease calls for more than comparing costs.

Renting a compact excavator provides flexibility in terms of how long you hold onto the equipment, plus lets you select the machine size and configuration best suited for the application.
Renting a compact excavator provides flexibility in terms of how long you hold onto the equipment, plus lets you select the machine size and configuration best suited for the application.
Buying new lets you to take advantage of the performance enhancements provided by the latest technology, but a used purchase can significantly reduce the initial capital investment required.
Buying new lets you to take advantage of the performance enhancements provided by the latest technology, but a used purchase can significantly reduce the initial capital investment required.
If the utilization for the compact excavator is expected to be over 60%, or you need to have the machine on site for extended periods of time, a purchase may prove to be the most cost-effective...
If the utilization for the compact excavator is expected to be over 60%, or you need to have the machine on site for extended periods of time, a purchase may prove to be the most cost-effective option.

Uncertainty over how emissions technology will affect productivity and operating costs is compounding this shift. “Contractors are rightfully being very cautious about committing resources to a technology they may feel is still unproven in terms of applications,” Bierschbach states. “In addition, the tougher standards are often addressed with aftertreatment exhaust systems. To a contractor, that’s a maintenance hurdle in unfamiliar territory. Many contractors prefer to shift that responsibility to the rental provider when it comes to compact excavators.”

A Matter of Utilization

Of course, rental is not a one-size-fits-all solution. It’s important to look at all of the factors that can influence the most cost-effective way to obtain a compact excavator. According to Strand, they include:

the number of hours put on the machine annually;
how long you intend to keep the equipment;
maintenance costs required for the equipment each year;
financing programs available when purchasing the machine;
and the type of cash flow you are looking to obtain.

Of these, expected utilization typically tops the list. “The ‘buy’ conclusion has to be based on future utilization,” says Bartecki. “Because you are committing to at least a 60- to 72-month financing payment cycle, you had better be sure you have the work over this time period to cover cash flow requirements.”

He recommends purchasing the machine if you expect an annual time utilization of 60% or more, based on 22 days of use per month. “From 40% to 60%, you are in middle ground, but you need to be sure you are going to hit the higher end of the spectrum. If you are not really, really sure about time utilization, then rent until you have a clearer picture,” he advises. “Lower than 40% is a rent situation.

“And let’s not forget transportation costs. If you own the trucks and trailers to move the equipment, you have another costly investment with zero time utilization when the construction equipment is in the field,” he adds.

The length of time you need to hold onto the machine is another key consideration. “Are your needs short term or are they long term? Obviously, if your needs are long term, if you look at the stream of rental payments you’re going to pay, they become closer to a purchase,” says Michaels. “If you have multiple projects that would get you to the point where you will spend 50% to 70% [of the purchase price] in rentals anyway, maybe you should own it.”

Even lower hour usage machines kept for longer terms may be more cost effective to purchase, says Strand. He cautions, however, that you should understand your tax situation and current tax laws in effect for purchasing equipment. “The customer should always check with their tax accountant prior to obtaining equipment to achieve the best benefit,” he states.

A Lesson in Leasing

Leasing agreements offer another means to acquire equipment without making a substantial capital investment. They provide a fixed budget amount for an extended term, typically 12 to 36 months.

“This works great for the customer who does not want to tie up working capital,” says Strand. “It also allows the customer to rotate their equipment on planned replacement cycles, which can potentially reduce maintenance and costly downtime.”

Leasing may also reduce the amount of tax paid to acquire the equipment. To illustrate, Michaels notes that in California, there is a 10% sales tax on new car purchases. With a lease, you pay 10% of the lease rate. “So instead of buying a $40,000 car and paying $4,000 in fees up front, you may lease it for $400 a month and only pay $40 a month,” he explains. “So it’s fractional because you’re only paying for a portion of it.” A similar principle often applies to leased equipment.

Again, utilization typically determines whether a lease is the most cost-effective option. “Customers who are consistently renting the same size machine for their work for four to five months a year should consider rent-to-own or a lease to acquire the equipment,” says Strand. “The cost of usage will decrease even more if they find other usages for the equipment, and it will be cheaper than renting.

“The potential downsides,” he continues, “are maintenance costs, not needing the equipment as long as you thought or needing different equipment for different jobs. Once you buy or lease you are locked in for a fixed time period.”