Maintaining the right inventory of construction equipment while balancing cash flow can be challenging. Fleet managers must determine if a piece of equipment will be needed for several jobs or just one.
For multi-use equipment, questions of useful life, maintenance needs, and overall cost of ownership have to be considered. Cash purchases and bank loans are common payment options, but lease financing may be less familiar. Read on to understand the options and how a construction company can leverage the right financing to break ground but not the bank.
This question boils down to whether it’s better to own a piece of equipment or to pay for the use of it for a limited time. Fleet managers must consider the lifespan of a piece of equipment, its total cost, and whether it’s likely to be used on multiple jobs before they decide whether to lease or purchase.
Purchased equipment can be used without limitations, but the buyer is responsible for all maintenance and repairs, which can cause unexpected hits to cash flow. It also requires an outlay of cash, either for the full purchase price or a down payment on a loan.
Leased equipment — depending on how the lease is arranged — can be used for months or years, sometimes with a reduced-price buyout at the end. Often, leases come with maintenance agreements that protect the lessee from unpredictable repair bills.
| Your local Bobcat dealer |
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| Pinnacle Central Co Inc |
Leases can make sense when the equipment is only needed for a few jobs; when it could become obsolete quickly; or if the lessee wants to avoid a large, upfront cash payment.
If the decision is made to purchase equipment, the next choice is whether to pay cash or take out a loan. The biggest determinant here is the availability of cash. Most companies can’t free up the cash to buy outright, but in certain circumstances — say the recent sale of a capital asset — it might make sense from a tax perspective.
Taking out a loan is the more common path. The main question with bank loans is whether the interest rate is variable or fixed. Variable rates can look tempting but can result in higher payments in the future.
There are two types of leases to consider: operating and finance. With operating leases, the lessee makes monthly payments and may return the equipment at the end of the lease term. Operating leases are appropriate for equipment that has a short lifespan or that is likely to be superseded by newer technologies. It’s also a good choice for situations where a company needs a specialized piece of equipment for only one or two jobs.
| Your local Bomag Americas dealer |
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| Linder Industrial Machinery |
Finance (also referred to as capital) leases work more like a rent-to-own arrangement. The lessee isn’t required to buy the equipment at the end of the lease, but they usually have the option to do so, often at a bargain-basement price. Finance leases make sense for equipment with a long expected work life and high upfront costs.
Leases allow companies to add new equipment easily without the need for additional bank approval, as would be required for a purchase loan. Lessees can match payments to cash flow and avoid disrupting existing lines of credit. Usually, the lessee can delay payments until the piece goes into service, and most or all the monthly payments may be deductible for tax purposes.
Leases also offer the opportunity to upgrade equipment frequently and without hassle. More and more equipment comes with embedded technology, and what may be cutting edge one day could be obsolete the next. Lessees don’t run the risk of being saddled with out-of-date equipment they can’t sell.
Most construction companies will have a combination of owned and leased equipment — some under operating and some under finance leases. The smart fleet manager will optimize this mix to best manage company needs with cash flow realities.
