End of year evaluations come before New Year’s resolutions in the landscaping industry, especially when it comes to making decisions about equipment inventory. Your year-end ledgers will reflect where your company has been and where it is today.
Although you can’t predict the economic future or control the weather, when it comes to driving your company toward success, you are the one behind the wheel. Before starting on your New Year journey, the question you need to ask is: if we’re going to get new equipment, should we buy, rent or lease it?
As you analyze your company’s financial profile, this is the best time to re-visit the choices you have when it comes to purchasing your equipment. Having a solid understanding of financing options will make it much easier for you to decide which program is right for you in the coming year.
Changes in the economy, government financing and tax codes have almost completely transformed the way landscape contractors acquire equipment from those of the past several years. Landscape contractor consultant Tony Bass, with Vanderkooi and Associates, has been advising more than 38 landscape contractors for more than a decade, and has seen the industry preference change dramatically.
“From 2001 through 2004, leasing equipment and lease financing was extremely popular. But today, with lower interest rates making purchasing more affordable, leasing is less than one out of ten,” Bass said. “In addition, the IRS tax code was amended in 2008 as part of the government’s stimulus package. Businesses can now deduct the full purchase price of equipment up to $250,000, and also allow for first-year 50% bonus depreciation for any over-limit equipment. This provision gives landscape contractors a better tax incentive to finance their purchases. So they tend to lease a little less often.”
Buying, of course, means the equipment is yours once you’ve paid for it. If the equipment is something you’ll likely be using for many years, buying is a significant advantage. Don’t forget to add in the cost of maintenance, storage, insurance and depreciation. Some contractors run their business with the “he, who has the best toys, wins” mentality and think that they need to own everything. Bass has seen company owners get into trouble because they buy pieces of equipment that they simply do not use enough to substantiate owning them. “I have a client who purchased a $45,000 tow-behind hydroseeder, but the machine is only in use about 100 hours a year. When you spread out the cost of this purchase, the hourly operating fee has got to be huge in order for him to recover the cost of that one piece of equipment.”
No matter how attractive a new piece of equipment may appear, if it’s not right for your company, it can mean a huge drain on your bottom line.
Jason Sponzilli, vice president, Sponzilli Landscape Group, Fairfield, New Jersey, owns 95 percent of his equipment and 90 percent of his trucks. His company purchases at least one new piece of equipment every year that he feels is necessary to grow his business. However, there are times when he gets stuck with a product that didn’t live up to his expectations.
“We’re still trying to sell a piece of equipment that we bought in 2003 that looked good at the time. After we had it for a few months, we found out it wasn’t what we wanted, so now it’s sitting idle on the back lot. Sometimes it is more cost effective to rent the equipment first. If we’d done that, then we would have known it wasn’t right for us and we would have only been out the rental fee.”
Renting is definitely a viable option for the contractor who wants to get the feel for a new piece of equipment with minimal financial investment. It gives you the opportunity to try a cutting edge machine for a job without making a commitment to purchase it.
David Kampmeyer, general manager, Action Irrigation, Jacksonville, Florida, prefers the rental option because of the additional benefits of no maintenance cost or storage fees. “The upkeep and maintenance costs are part of the rental agreement,” he says. “And warehousing unused equipment can be expensive.”
Frequency of use is also a factor when it comes to the decision to purchase or buy equipment. Chris Hecht, Chris E. Hecht Design and Landscape Construction, Oakland, California, says it depends on the project. “Our company does mostly hillside, minimal access or steep access projects. The frequency of these types of projects—where we would need to use hydraulic equipment—is inconsistent, so it really doesn’t pay for us to own bigger equipment. Anything larger than power hand tools, we rent.”
Hecht also feels that renting is a much more stable way to finance your company without piling up a huge amount of debt. “I’ve seen so many auction pamphlets that show equipment for an entire landscape operation going on the block. Sadly, someone got carried away and purchased too much equipment on easy credit and now they’re out of business.”
“Renting is ideal if you’re only going to be using the equipment for short periods of use, say from one day to six months,” said Bass, “or for a project where you need a special piece of equipment, like a crane, for a specific job. But leasing would be the way to go if you needed something long-term and didn’t have the cash-flow to purchase it.”
Although not as popular as it once was, leasing is still a viable option when you need quick credit approval and want to make a lower down payment than you would need for a typical purchase financed loan.
Mark Williams, vice president, eLease Funding, St. Petersburg, Florida, says leasing offers two chief advantages over buying. First, you pick the equipment and brand you want to lease. Second, most leasing companies will fully finance the purchase, so there’s no need for a down payment and your capital remains available for other operational needs. Thirdly, 100 percent of the lease cost is tax deductible.
“A leasing contract is a three-way contract in which you agree to pay the leasing company back for the equipment from the vendor you chose. The leasing company agrees to pay your vendor and you agree to make payments—the rest of the contract covers the terms of what happens if you don’t make your payments,” Williams said. “You are responsible for all the monies under the lease, regardless of the effectiveness of the equipment your vendor provides. Another advantage is that the company that owns the equipment is responsible for its maintenance.”
A disadvantage to leasing is that at the completion of a lease, you have nothing to show for it, unless you have a buyout option. If you do lease equipment, keep in mind that you will need to pay state sales tax and that should be factored in. If you decide to purchase the equipment at the end of the lease, remember there is a use tax and, in some cases, a personal property tax, depending on the state you live in. You may end up paying more taxes than necessary if you do not fully understand how they are handled in the contract.
Buying means the equipment is yours ...
Renting is for the contractor who wants a new piece of equipment with minimal investment...
Leasing offers a 100% tax deduction
Glenn Guenther, Glenn’s Lawn Care, Lancaster, California, laments his experience with leasing. “I’ve leased two pieces of equipment and will never lease again. First time was a lawn mower a few years ago. A drunk guy in a trash truck ran over it, along with my trailer. It was a lease with a $1 buyout at the end, so I paid the last couple months lease and sent the $1 in, thinking I was done. Then I get a bill for property tax.”
“I’m a couple of years into a lease on a mini skid steer now. I guess I didn’t read the lease agreement well enough, but every year I get extra bills in the mail. Property tax is one. I have to carry an extra insurance policy just on the skid steer. The limits required by the leasing company are so high that most insurance companies don’t want to write the policy, although the leasing company is willing to carry the insurance, but at a very high price. Now, I buy when I can and rent if it’s too expensive or if I don’t use it often enough.”
Another option which some landscape contractors like to utilize is a mixture of programs. They will purchase a large piece of equipment, like a skid loader, and then rent different attachments to do a specific job. That one piece of equipment can then be used for a variety of jobs year-round, from moving mulch and soil to snow removal.
When equipment has a three- or five-year life span, leasing some of the inventory works well to help keep cash flow healthy. Heads Up Landscape Contractors, Albuquerque, New Mexico, President Gary Mallory says they own 25 skid loaders they roll out on a three- to four-year cycle. “We trade them in, purchase and lease with an option to buy. Usually after about six months, we exercise our option to purchase.”
Contractors may also choose to own some equipment, but on items such as lawn mowers, leasing gives them the ability to work the mower more vigorously through the term of the lease. When the leasing contract and the mower’s usefulness expires, they can return the used equipment and lease a brand new one for another few years.
When deciding whether to buy, rent or lease, it’s important to look at the transaction from all angles: length of financing, tax savings, other capital needs and total costs. Above all, do your homework. If you’re going to lease, make sure you are completely aware of every detail of the contract. Many areas have several equipment rental companies, so you can shop around for the best deal. With careful planning and a bit of diligent work, you’ll have all the information you’ll need to determine what is best for you—buy, rent or lease.