Your landscape or irrigation company really needs a brand-new piece of expensive equipment. But capital is short right now. The recession put a crimp in your business that you haven’t fully recovered from yet.
However, there’s work out there that you could be getting if you had this machine. Should you rent it as needed, lease it for a year, or swallow hard and finance it?
Maybe you’ve always believed that renting and leasing is not the way for you to go, since it usually costs more in the long run. But making big monthly payments, or coming up with a sizable down payment right now, means you’ll have to cut back somewhere else; maybe even letting someone go. What’s the best decision here?
It’s the sort of thing that can keep a landscape contractor up at night. The truth is, there’s no single right answer to this question. The right decision will be the one that’s right for your business at that particular moment in time.
Let’s take a close look at the three options—renting, leasing and buying—and examine the pros and cons of each one in the cold light of day.
Renting is the one-night-stand of equipment supply. You get to see if there’s any chemistry between you and a particular brand or model before you decide to go steady. This is one of rentals’ major advantages.
Many contractors use renting as a means of field-testing expensive pieces of equipment. You can rent a machine for a day or two and ride it hard on a jobsite. If it performs to your liking, then you may want to make a longer commitment, lease it, or even buy. You can also test several competitive machines to see which one best suits your crews, your clients and your way of working.
Renting is great for equipment that’s rarely used. If you know that you’ll need a silt fence trencher only ten days out of the year, or on one certain job coming up in July, then renting makes perfect sense. Why tie up capital in equipment that’s going to sit idle most of the time?
“When you need an expensive piece of equipment, like a compressor, for two to six weeks, it’s usually more cost effective to rent it and amortize the cost across all the jobs you’ll be doing,” said John Eggleston of Lansing, Michigan-based ServiceFirst Irrigation. “More of the bigger contractors with multiple service technicians own one compressor that they use for early and late winter blow-outs, and then they rent the rest for their major pushes. Ninety-plus percent of them will be renting those compressors.”
Of all the options, renting allows the most flexibility. You can return the equipment early, or keep it longer if the need arises, without any penalty. Renting also allows you to bridge gaps in equipment needs. Say your favorite workhorse, a walk-behind mower, blows up at the start of a busy week. You can rent an equivalent until you can fix or replace the broken mower, and not have to postpone or cancel jobs.
There are a few other advantages to renting. You aren’t responsible for maintenance. If it breaks, you give it back. Nor do you suffer the depreciation costs. Often, there are discount rates on longer contracts. And the equipment is always new or nearly new.
On the downside, rented machines may have a definitive learning curve. Unless you can be sure of renting the same brand and model each time, controls will be in varying places. The “feel” may be different. Your crew might take a bit of time getting used to things, and that could slow down the workflow. By the time they do get used to the thing, it’s time to send it back. Pickup, drop-off and the attendant paperwork involved eats up time, too.
The cost-per-day could be high. At some point, whether it’s ten days, two weeks or a month, renting may stop making sense and start making red ink.
You need to take pains to see that rented equipment is returned on time and in good condition. Paying late fees is a waste of money, and abusing the equipment will earn you a bad reputation with the rental outfit and hurt you the next time around.
Professional landscaping equipment leads a rough life. Experts recommend replacing mowers and other heavy-use gear on a three-year changeover cycle. You may balk at getting rid of a mower or truck that’s still in good condition, but a regular turn-in keeps you using the latest and greatest, and keeps downtime to a minimum. Swapping older mowers for new models with electronic fuel injection (EFI) and saving 25 to 30 percent on fuel sounds very good indeed. Leasing allows you to do that easily; that’s the main thing it has going for it.
Leasing is a longer-term rental agreement, usually a year or more. There are two different kinds of leases, ‘operating’ and ‘capital.’ In operating leases, equipment is returned at lease’s end; capital leases often include a lease-to-purchase option. In general, the larger a piece of equipment, the longer the lease, with large trucks and earth-moving equipment at the top of the scale.
Down payments may be waived. A contractor can take a current-year tax deduction on an operating lease as a business expense. In a capital lease, the property is subject to tax depreciation rules. (With any tax question, check with your tax professional, because both IRS and state rules are always changing.)
Leasing offers many of the same advantages as renting. Unless you lease to buy, you’ll always be using newer equipment. Many contractors lease all of their equipment, because it reduces their upfront costs and brings all their equipment down to one monthly payment (if they’ve leased it all from a single vendor). Leasing everything from one entity gives you more ability to negotiate for reduced rates.
According to the U.S. Small Business Administration website, “There are many variables to consider when making the decision to lease equipment. If you need that equipment for the long term and want to establish equity in it, try to negotiate a purchase option under which a portion of your lease payments is credited to the purchase price. If you use the leased asset in your business, you may enjoy a potential tax advantage, because your lease or rental payments are fully deductible.”
Disadvantages include higher overall cost. Studies have shown that leasing can cost 20 to 30 percent more than purchasing in the long run.
Leasing carries higher interest rates than purchasing. You risk getting locked into a long-term contract that’ll be difficult and expensive to break. Early-termination fees can be hefty. You can get stuck paying for the entire lease term for equipment you no longer like or are no longer using.
Unlike rentals, you may be on the hook for the insurance (comprehensive coverage is usually required) and general maintenance. And you may still have to pay personal property taxes on the leased equipment.
When it’s turn-in time, there could be some unwelcome and costly “surprises.” Minor damages could result in exorbitant fees, even if you weren’t at fault.
Should you decide to lease, be wary of enticingly low introductory monthly payments, which is how unethical leasing companies operate.
Once entered into, payments can balloon to as high as 11 or 12 times the original rate.
Heed this advice for interest rates as well. Adjustable rates, which fluctuate according to the prime rate or another index, can be risky; remember what happened with housing loans? Fixed rates are more appealing because, while usually higher at first, they can’t suddenly jump way up and play havoc with your monthly operating expenses.
Do your due diligence; look for companies that routinely write leases for landscape equipment and know what the values will do over a several-year period. Equipment dealers and manufacturers know which leasing companies regularly work in the landscape field. Your bank may also offer leasing terms that are competitive.
Read the fine print on your contract and look for potential problems. Is a security deposit required?
Do additional penalties exist for extra miles, damage or wear and tear? Who covers insurance, taxes and maintenance on the equipment? If the leasing company offers insurance coverage, compare their costs with other insurance companies. Premiums can be much higher than those secured independently, and may already be covered under your own policy.
Finally, it’s a good idea to get your legal advisor to review any lease agreement before signing. And whatever you do, don’t sign a personal guarantee.
Ownership has its privileges. When you buy a piece of equipment, you’re in complete control of how it’ll be used and maintained. And, unlike equipment that’s rented, you know where it’s been. When you think it’s time to put it out to pasture, you can sell it or cannibalize it for parts. Buying is usually cheaper in the long run, even with insurance and maintenance costs, especially for established businesses that can plan for equipment longevity. If it’s something you’re going to be using daily, weekly or even monthly, purchasing may be the best option. And, as you continue to pay for the item, you’re building equity in it, just like a house.
Remember, buying all your equipment from the same dealer gives you leverage. They want your repeat business, so there’s plenty of room to negotiate. Of course, the more you buy, the better the deals should be. Do your research and find out what dealer incentives they’re getting and what the base prices are.
There are tax benefits, too. The year you buy a piece of new equipment, you can take a current-year deduction on it. In 2013, you could deduct up to $500,000 worth of equipment. If you were in a 25 percent tax bracket, and purchased $100,000 in business equipment, the net cost to you is only $75,000. You can amortize the depreciation over the life of the machine and itemize the maintenance, fuel and oil costs.
Don’t forget about used equipment. Rental companies, contractors going out of business, and new equipment dealers with trade-ins to sell are all good places to shop for something you can’t afford to buy new. Someone else has paid the upfront costs and the depreciation.
This is an especially good option for machines that won’t be used every day. If you’ve got a decent maintenance shop to keep things purring, whether in-house or outside, this may be a good way to go.
On the con side, there’s depreciation, familiar to anyone who’s ever bought a new car. Once you drive that rider or skip-loader off the lot, it’s lost a lot of value. By the time you get around to selling it, features on newer models may have made your machine obsolete. (Bought a five-year-old computer lately?) Purchasing carries more financial risk upfront, as many lenders require a 20 percent down payment.
This could deplete cash reserves and tie up current loans or lines of credit.
Whether you decide to rent, lease or buy, information is power. Before you enter into any agreement, be sure you’ve carefully weighed all of the pros and cons. If you’re unsure about something, ask somebody. Get advice from fellow contractors, preferably someone who’s been in business longer than you. Don’t be afraid to get a consultation from an accountant or lawyer, especially on a large purchase or a long lease agreement. Even if you have to pay a fee, it still may be cheaper than some expensive mistake down the road.
Like so many business decisions, this one comes down to more than money. It’s also about your comfort level. Do a gut check; make sure that whatever you decide, you’re going to be able to get some sleep at night.