Buy, Rent Or Lease? Raleigh NC

For many contractors, shopping for construction equipment can transform them into business managers. Do they rent, lease, buy, or borrow? They may know the kind of equipment they want, but after looking at a fleet, they may change their minds because of price, technology, repairs, and the ease in which they can or can't obtain that one piece of equipment they need.

Renting is a common practice to acquire equipment immediately. This method increases cash flow, cuts costs and frees capital for other purposes. The American Rental Association estimates that 80 percent of the 18,000 rental operations in the United States and Canada rent some construction equipment. To make renting easy for contractors, the ARA helps contractors find rental stores on its website as contractors can log on, select "Find A Rental Store" and contact their choices without leaving the office.

Create an acquisition plan

As contractors prepare for their construction season, they also include equipment rental in their business plans. The concept behind renting is that it's temporary with little or no maintenance and does not affect their profit much. Contractors sign a rental agreement that they are paying for a short-term service depending on their needs. Contracts are in effect when contractors leave the store with the equipment and ends when they return it. In between this time, contractors are responsible for use and safety of the equipment.

Equipment rental may be the best option if contractors accept jobs in different geographic areas. Rental stores carry the same equipment and service from coast to coast and are inexpensive alternatives to transporting medium- or large-size equipment. When the job is complete, contractors return the equipment with no maintenance, transportation costs or storage issues.

One consideration is insurance coverage. Many contractors have coverage that will include equipment rental; if not, the extra cost may be minimal and is a tax deduction.

Advantages of renting equipment:

1. No maintenance cost. The agreement covers all maintenance and contractors save time and money.
2. No down time. Contractors obtain equipment without waiting and if the rental equipment breaks down, the dealer will replace it immediately.
3. Return equipment after use and there's no need for storage.
4. Personal property taxes and license costs do not apply to rental equipment.
5. Advanced technology on equipment is available without extra cost. Contractors don't have to worry about obsolete equipment.
6. A large capital outlay is not necessary and rented equipment is not a liability.

Lease for longer terms

Equipment leasing is another option to acquire equipment. Somewhat similar to renting equipment, a lease is usually for a longer term and without upfront costs. Contractors sign an agreement in exchange for regular payments designated in the agreed upon terms. With some leases, contractors may have to maintain the equipment but a major benefit is the tax deduction that contractors can fully claim.

At J. D. Evans Inc., equipment dealer in Sioux Falls, South Dakota, about 40 percent of the business is rental and leasing of highway and heavy equipment, said Jack Babb, president.

"In the short term, it is cheaper to rent equipment. If contractors have a job that runs 60 days, then they rent. When they're done, the equipment comes back to me and they don't have a big loan against it," said Babb. He emphasized that the type of job determines the type of equipment. Then, many variables enter into the decision of either renting or leasing.

"A lease is different, it has a longer term and contractors lease for some tax advantages. The leasing company owns the equipment and leases them to contractors so the leasing company takes the depreciation. Contractors will rent or lease to fill in on a job and for capital and bonding reasons. It's difficult to own because of capital outlay."

A high percentage of contractors have rented or leased equipment because they don't have enough capital and because they don't want the debt.

Debt vs. technology

Babb said bonding companies are happy to see contractors rent or lease equipment because "the companies don't want to see contractors with a lot of debt. If they have debt and can't pay it, then bonding companies go in and recover the job that contractors didn't finish. Eventually, they approach the contractor for the debt."

Another consideration is insurance for the rented or leased equipment. Babb said contractors must insure their rental or leased equipment. Most go to their insurance companies and obtain a certificate of insurance to the dealer for certain pieces of equipment at a specified value.

A major advantage of leasing is keeping up with the latest technology. Equipment technology changes constantly and the market is flush with updated equipment. As new products roll out, contractors who own equipment know their equipment is outdated and is depreciating rapidly. Leasing is another alternative to acquiring up-to-date equipment that will help contractors perform more work in a shorter time.

Lease options

Contractors also participate in lease-to-buy or rent-to-buy programs. They can try out the equipment during the rental or lease period and decide if they want to buy. Finance leases are the best idea for contractors who intend to keep the equipment at the end of the lease. The major advantage is that the lease provides the option to purchase the equipment for a nominal fee. However, payment terms tend to last close to the expected useful life of the equipment.

A true lease offers the option to purchase, renew or return the equipment at expiration of the lease and is useful for federal income tax purposes.

Banks and other companies that provide equipment financing checks backgrounds of everyone who leases or buys equipment. They're mostly concerned only with credit histories over the last six months before the lease application than with loans which require a longer credit history.

The benefits of buying equipment are ownership of the goods, avoid more paperwork that occurs with renting and leasing, and having the choice of proper maintenance. There are no hidden clauses to meet and other agreements that contractors don't wish to sign.

Manufacturer specials

Some equipment manufacturers offer special financing if contractors buy from its dealers. Case Construction Equipment, for example, is offering low-rate financing on its skid-steer loaders, compact track loaders, compact excavators, large excavators, and loader backhoes through December 31, 2007. Financing, through its CNH Capital America LLC arm, is at different rates depending upon the model contractors are considering.

For example, all models of compact excavators, compact track loaders and skid-steer loaders are eligible for zero-percent financing for 36 months. Other equipment is eligible for financing ranging from 0.9 percent to 2.9 percent. Jim Hasler, a vice president at Case, said, "These finance offers come at year end to help business owners take advantage of tax strategies." In an uncertain economic period, contractors must decide if these specials are worth their time and money.

A wide variety of methods to acquire equipment may be used to add to a fleet of equipment. Contractors have opportunities to acquire and use updated equipment without waiting to own the equipment. Creative financing has broadened to give contractors many choices depending upon their finances and work situations if they do some research for the best method to acquire equipment.