As a business owner, your days consist of one decision after another. Some are no-brainers: “Should I update my website?” Of course! “Should I check this prospective employee’s background?” Absolutely. “Should I buy this piece of equipment? Hmm . . . let’s think about that one.
When it comes to your company’s rolling stock, the large, expensive machines you use to perform your services, the decision may not be so easy. Before you lay out a substantial amount of cash to purchase that commercial zero-turn mower, skid steer, or compact loader, there’s an important decision to make before you commit your company’s treasury. That decision is whether to rent, lease or buy it.
One of these approaches is not necessarily better than another. There are times when each one of these three options makes the best sense economically.
Do you need the piece of equipment now, or can it wait? Is there revenue you’re missing out on because you don’t have it? If you bought it, how often will it really be used? Answering questions like these can help in the decision-making process.
This is not the same as leasing. Leasing is longterm; renting is short-term. It’s great for equipment you only use occasionally. It’s a lot cheaper than purchasing, or signing a long-term lease agreement for an expensive machine you’re only going to use a couple of times a season.
Russ Collier, president and in-house salesperson for Hydrograsscorp.com in Pittsfield, Maine, says contractors mainly rent machines because they don’t think they have the need to own them, or don’t have enough volume in that particular service to justify a purchase.
“Rental is convenient; they get a machine that’s been completely serviced, every time they pick one up, and they don’t have any of the maintenance costs.”
Rental rates are usually higher than leasing rates. If you find yourself renting something often, get a quote on a lease. If you add up the rental fees you’ll incur over a year and compare it to the cost of leasing for that same stretch of time, you’ll probably find the lease to be much more cost-effective.
The owners of Brewster, New York-based Arborscape, Inc., rent several bark blowers every spring. “Everybody wants their places mulched by Mother’s Day,” said managing partner Nick McLaren. “We only have five weeks to get to all of our clients, working ten hours a day, doing just that. Without the blowers, we’d need to hire a tremendous amount of manpower.”
The bark blowers save not just time, but materials. “The machine spreads the mulch a little bit lighter, and more evenly. By hand, some guys will put two inches over here, and four inches over there, because they’re just dumping it out of a wheelbarrow.”
Some mulching is done by hand after those first five weeks, for the same price. McLaren noticed that when the blowers are used, his profit margin is much higher.
The mulching operation is extremely profitable.
Since bark blowers are needed every year, McLaren’s other two business partners were willing to buy them. He talked them out of it.
Renting can be a tool in getting a company off the ground. When Rick Meinzer, owner and chief creative officer of Platinum Landscape, Inc., Cedar Hills, Utah, started that business, he didn’t have the resources to buy equipment.
“So, I rented it, and expensed out the fees into the jobs. For a new company, it’s a smart way to go. You don’t get cashstrapped right out of the gate.”
Leasing involves longer-term agreements than rentals, usually two to three years. There are many different kinds of leases; operating and finance are the most common. If you lease something that has a purchase option or a significant residual value, that’s called an operating lease.
“You get to expense the entire pay ment of an operating lease each month, right up front,” said Dan Gundacker, product marketing manager at John Deere Financial. “The advantage to that is, you don’t have to book it as an asset, or as a liability, and you don’t have to depreciate it. It offsets your income, so it protects some of your profits.”
A finance lease works a bit differently. “Normally, you can’t expense a finance lease, because at the end, the value of the machine is usually so low,” he said. “You’d have to book it like any other asset, and depreciate it each month. You would get to expense the amount of depreciation each month, and deduct the interest, but you’d have to book it as both an asset and a liability.”
“As a new business, looking at the that makes sense for me to lease, long term, there’s some equipment and others that make sense for me to buy,” said Jorge Castaneda, owner of Arboristas, Inc., Valencia, California. Although opened just this past July, it’s already a $1-million-peryear tree care company, offering arbor health care, pruning, bracing, cabling and other services.
Castaneda chooses to lease his company’s pickup trucks and the small SUVs his business developers drive. Depreciation is one of his main reasons. “The vehicles decline in value a lot quicker than the equipment does.”
Racking up the miles speeds up that process. His business developers put an average of 33,000 miles a year on their vehicles, so it makes sense for him to lease them and expense those miles, along with the lease payments.
Why not just buy the vehicles and take the depreciation? Castaneda says that, after a while, high-mileage vehicles start requiring more substan- tial maintenance and repairs. “That starts to add up, and can really eat into your profits.” Leasing keeps his business developers in newer vehicles that he doesn’t have to worry about.
Some contractors aren’t comfortable with leasing. Meinzer is one. “It’s a waste of money. You’re paying somebody else to use that machinery, and when you get done paying for it, you still don’t own it.”
David Martinez, owner of Kokopelli Landscaping, Inc., in Santa Fe, New Mexico, agrees. “I don’t take on any long-term notes or leasing-type deals. We pay cash for everything, just to be solvent; that’s the way we’ve done it since we started in business 32 years ago.”
“We’ve never had any problems, even when the economy went south in 2008, because we owned everything we had,” said Martinez.
Though he acknowledges that doing business this way isn’t right for everybody, it’s worked well for him. Even when he first started out, he paid cash for his equipment, with money he’d saved up from another job.
He’s seen a number of his competitors get into trouble with leasing. “When the economy takes a nosedive like it did, it affects everybody. All these guys who were leasing equipment owed more than they were bringing in, and ended up having to file Chapter 11, because they couldn’t make their lease payments anymore.”
On the other hand, some contractors find it advantageous to lease even the equipment they use every day, such as mowers. “We’re seeing many more landscape contractors consider leasing, even with mowers,” says Gundacker.
Lansing, Kansas-based Personalized Lawn Care is a landscape, lawn maintenance and nursery company that turns over about $1 million a year, and has 30 employees. Snow removal is part of their winter service menu.
Founded in 2001, the company has never leased anything before. But starting this year, the company’s entire commercial mower fleet, consisting of two 60-inch stand-ons and three 52-inch stand-ons, is leased.
Vice president Angie Hundley said the idea of leasing mowers came from the company’s accountant. “She advised us that when you lease, you can write off the entire monthly amount versus only being able to write off a portion of a loan payment. With a purchase, you can only write off the monthly interest and the depreciation value (which was less of a writeoff than a lease option). From a budget perspective, it made good sense to lease.”
The company’s accountant did a full cost/benefit analysis. “We looked at the options available to us for buying and for leasing,” Hundley said. “You can write off depreciation, but every year, the amount you can write off decreases as an asset ages and matures. It saved us more money to write off all of the monthly lease payments than to take that decreasing depreciation. That’s what it came down to.”
The company did purchase one piece of new equipment this year, a mini-excavator. “That was something we always used to rent as needed,” said Hundley. “Leasing our mowers saved us so much money, it allowed us to go ahead and take on a piece of bigger equipment.”
A lease agreement is for a set number of months and hours. What if you turn a machine in early, or go over the hour limit? “Every lease has a penalty, if you exceed the number of hours,” said Gundacker.
“That doesn’t mean you’ll always get charged for that, however.”
“If a contractor goes over, but leases another machine from us, then we’ll cut that overage fee in half. If they’re under the hour allotment, and don’t want to buy the machine, then we’ll give them a bonus towards the next machine they lease.”
Ultimately, you’ll have to be the judge of whether leasing is right for you. McLaren says he used to be “one of those guys who said, ‘Own, own, own!’ But now, I’m a big fan of leasing. I guess you get smarter with old age.”