From backhoes to bulldozers, construction firms need to have equipment that is reliable, up to date, and capable of performing on the job. Heavy machinery can be expensive to buy and can tie up significant levels of capital if purchased outright. Because of this, more and more companies now lease construction equipment as a means of getting the machinery they need at a price they can afford.
Just about any piece of equipment or machinery can be financed or leased in the construction industry and deciding which is the right approach for your business will be an important decision you will have to make. Each has clear pros and cons, and whether you lease or finance your construction equipment will depend on an array of factors. In this post, we will review both leasing and financing so you can determine which financing method is the right one for you.
Construction equipment leasing
Leasing construction equipment means you have full access to use and operate the machinery without owning it. Following the completion of the lease, you will have four options to choose from: lease the machine again at the new fair market value price, extend the lease at the new fair market value price, purchase it outright and become the owner of the equipment, or return the equipment and acquire an upgraded model. The flexibility that leasing provides is one of the driving factors why construction companies are leasing their heavy construction equipment.
Advantages of leasing
When it comes to leasing your construction equipment, there are many advantages over buying equipment upfront. These include:
- The opportunity to lease the most up-to-date equipment. This is especially useful in industries where technology needs to be upgraded regularly.
- No large upfront payments. This lets you structure your financial situation efficiently, allowing you to allocate funds effectively to help with growth.
- Leasing has many tax-related benefits that can help you financially and a qualified accountant should be consulted before you make a decision.
- Low monthly payments. You are only paying for a portion of the equipment so the payments are lower.
- Flexible end-of-term options. You have the freedom to choose what you would like to do with the equipment once the lease term ends.
Financing construction equipment
Equipment financing is essentially a loan. Usually used to purchase business-related equipment, these loans involve periodic payments paid over a fixed term. Once paid in full, you receive full ownership and title over the equipment you have been using. An equipment loan may also impose a lien upon additional business assets or require a personal guarantee before receiving the equipment.
Advantages of financing
Construction equipment finance offers some slightly different advantages, compared to leasing:
- With construction equipment finance, there is an added level of security as you will not have to worry about any unexpected costs that need to be paid following the completion of a lease.
- There is greater flexibility when it comes to financing with early buyout options and fewer penalties.
- For a larger company with good cash flow, financing interest expenses can be lower than leasing equipment.
- While construction equipment finance can involve the risk of depreciating, if your equipment sustains value it can be a benefit to your company.
- When financing you can usually expense soft costs such as installation and shipping charges to avoid any interest in carrying costs.
Building business with a multi-line lease
Loenbro, founded in 1998 in Montana by brothers Paul and Jon Leach, has grown to more than 1,000 employees working oil and gas, manufacturing, mining, power and utilities construction across 20 states. Leasing a fleet of equipment including fast fusion machines, pipeline trenchers, side booms, backhoes, rollers and more in 2018 accelerated the contractor’s growth.
“Getting the right equipment for Loenbro means that we can be on the cutting edge and be able to do something more efficiently,” says Paul Leach. “Like with the fast fusers, we’re able to fuse poly pipe a lot faster than the competition. You can drive down the line and do it from the cab. Any weather going on, it doesn’t bother you. And our efficiency has gone up big-time.”
Choosing an independent, vendor-agnostic lessor simplified Loenbros acquisition process for the fleet to a single contact.
“The more than I can narrow the field of who I’m working with, the more efficient I can be, and the quicker we can find solutions for customers,” says Chase McQuillen, equipment division manager at Loenbro.
Understanding the key differences associated with each equipment financing option is crucial to ensuring you get the deal that fits your machine application best. While it can all seem confusing, talking to industry specialists can help detail the advantages of each option in each acquisition.
Tom Haug is the Director of Construction, Material Handling and Manufacturing in Meridian.