Weighing the Options of Equipment Purchase and Leasing

Words: Nick Vaccaro
Photo: C&S Inc.

The costs associated with operating a business can be significant, and just like in the masonry business, the process of funds allocation and accounting can be daunting at best. A delicate balance must be maintained in the distribution of funds. Smart purchases must be made while directing other monies into holding accounts for the proverbial rainy days or if upfront capital is needed to fund a project.

That skid steer might carry a hefty price tag. Still, it needs to find validation when analyzing the savings in time, reduction in manpower, and the decrease in the probability of potential injuries like back strains. While considering those factors, attention must be directed at equipment procurement. After all, equipment should be considered tools needed to perform the job task.

The argument can be waged to justify the equipment. Planning and budgeting can even pave a path to ownership, but the big decision is purchasing or leasing.

Committing to the Purchase

Choosing the best option, purchasing or leasing, can be considered by considering several different parameters of one’s business operation. It is recommended that if the piece of equipment will not be utilized for at least 60-percent or more of your business tasks, purchasing should be avoided.

Another factor to consider is the capital expenditure associated with purchasing equipment. The entire expense cannot be deducted in its first year of being introduced into your company’s lineup. It will need addressing during tax season, and that capital cost will be amortized and depreciated over the lifespan of that piece of equipment.

However, purchasing equipment does work as a piece to the puzzle of a thriving business in some areas. Depending on the brand and equipment selected, they can carry a hefty resale value that can be taken advantage of when cycling old equipment out and replacing it with new at specified intervals.

Another significant measure of ownership is ultimate control of the equipment’s use and availability. Because it is privately owned, the equipment availability will allow companies to respond quickly to customer needs. Depending on the type of equipment, its rental or leasing availability might be scarce. Its popularity can also drive its availability at rental centers. While a bulldozer might not be in high demand, that skid steer loader might be met with seasonal demand, such as during the spring when yards are being revamped for planting. Having that equipment in your business fleet allows for instant response when needed.

There is a great comfort that comes with ownership of any mechanical device, and that is the owner knows the quality of the machinery being summonsed. The owner of that piece of equipment has maintained and cared for it. As a result, its dependability carries excellent weight in knowing that it will contribute to getting a job completed on schedule.

Most business owners are driven by the determination to convert their once fledgling company starting out to a hard-fought success story. Much like a mason stepping back to bask in what they have created, business owners gain the same sense of pride in what is needed in tools and machinery to make project completion possible. Additionally, the company that portrays an appearance of success is typically successful, and a fleet of equipment represents that fact.

Leasing Option

Much how the percentage of use should influence the decision to purchase, leasing packages carry their mandate in determining the correct fit for the business person needing equipment. While the terms typically dictate 24 to 60-month leasing durations, individuals inquiring about a lease can stipulate specific standards. For instance, the equipment dealership will allow the lease to choose the time duration. Of course, a credit score will play an important role, and the length of the lease all play a part in determining the cost of the lease every month.

An interesting factor to consider in the leasing alternative is the lease value itself. Although leasing a new automobile typically allows a driver to leave a car dealership in a new mode of transportation at a more economical rate, the heavy equipment industry can be a little more unique. The affordability or value of the equipment lease is directly affected by the resale market. 

When considering the need to bring a piece of heavy and specialized equipment into the business fleet, its placement in the resale market should be considered. If the machinery is highly technical, or their use is increasingly infrequent, the market may not drive high demand for their use. That use factor and resale value will cause the value of a lease. Suddenly leasing equipment for a reduction in price compared to purchase might not be a viable option.

The leasing option should not necessarily be avoided as it still carries possibilities and can be the correct fit for sure business owners. Leasing can still be less expensive than rental costs in providers within the proximity of the workplace. Lease payments can often be less than rental costs that see additional tack on items such as delivery, pickup, and fuel charges. The comparison is relative, and frequency of use plays an essential role in driving that ratio up and down.

No cost in maintenance plays a significant appealing role in leasing instead of ownership. A fresh start is possible, and if the lease solution proves successful, a new version on a newer piece of equipment is a signature away. While an individual is locked into a payment plan, the item is returned when it comes to term. The liability and any potential mechanical expenditures are removed from the company’s profit and loss statement as if they had never been there prior. 

Which is Better?

Frustration may mount in attempting to identify which method proves more economically feasible. Unfortunately, the answer is not always easy to announce. Both purchasing and leasing can render success, as well as economic stress. The key to deciding is to focus on one’s business model and proceed from there.

While purchasing or leasing, the individual remains locked into a monthly note for a specified duration of time. The only difference between a five-year purchase and a two-year lease note is the amount of time. When the five-year purchase has come to term, the equipment belongs to the owner free and clear. When the lease terminates, the equipment goes back to the company from which it was leased, and now another piece of equipment must be procured through a repeat process. 

Certain vital factors can be derived from this process. For the company leasing equipment, the short duration in term can be a financial savior if the business has soured or the equipment needs to falter. That two-year lease is nothing more than a benchmark to work towards and then relinquish the equipment from the fleet. It is much easier to struggle financially on a two-year lease than a five-year note for a purchase.

On the other hand, the individual who signs on to purchase owns the equipment outright after the note finishes. If the equipment is maintained, it will continue to make money for the company when it is put to use with minimal expenditures like fuel and insurance being realized.

If a company lacks financial security or strength or is new and just starting, the lease would serve as a more responsible and safe outlet to obtain the equipment. The stronger company weathered many storms could be outfitted with cash reserves making the purchase a better long-term investment. In these cases, a good look at the company’s financials and plan can decide between a lease or purchase.

The use factor in determining purchase is worth additional analyzing when studying a lease. While it is not recommended to purchase equipment for only 40% of the business year use, does that make leasing the automatic solution? When attempting to gain equipment ownership, the cost should be compared to projected income. What if the projected lease payments are higher than confirmed rental costs? If purchasing is not a viable option, that does not automatically indicate that leasing is the better route to take.

The deciding factor seems to be birthed from usage time. If the projected use time cannot support the annual lease payments or purchasing notes, renting is the safer route. While availability and quality might be sacrificed, it is a better alternative to paying for an item that will suck up profits in the end. 

That alternative could always change as the business’s income statement and project scope change. As funds, security, and job books increase, the likelihood of a purchase or lease will grow accordingly. When deciding, careful consideration of usage time, costs of payments, and reserve funds will all guide the would-be owner to a successful path of ownership.