The term “heavy metal” is used to describe a genre of ear-splitting, head-banging music. But it’s also a good term for describing the large equipment you must use as a contractor.
Do you remember that first piece of big iron you bought for your business — that first zero-turn mower, dump truck or skid steer? There may have been some head-banging involved there, too, depending on how the transaction went. We hope to give you some tips on buying, leasing or renting equipment so you can do it without banging your head ... unless you want to, of course.
Many contractors prefer to own their equipment. Jorge Castaneda, owner and president of Arboristas, a tree care company based in Santa Clarita, California, buys the machinery he uses to trim and cut trees. “The heavy equipment, like a wood chipper or a chipper truck, a dump truck, a boom truck, those are hard assets that don’t devalue as fast as regular vehicles,” says Castaneda. “It’s better to buy them new and use them over the long haul.”
Frank Niccoli used to own a large landscape company in the San Francisco Bay Area. He sold his business in 2013 after 35 years in business. Now he teaches contractors what he’s learned. One of his classes covers how to buy equipment. “One of the first things my students hear is ‘The 50 Percent Rule’ — if a piece of equipment is going to sit idle 50 percent of the time, then it should not be purchased.”
But there are exceptions to that. “It depends on what your goals are,” adds Niccoli. “If you’re planning a growth spurt, you may be able to justify that purchase if your productivity is going to increase because of it.” A good example of this is being able to cut more grass with that new 72-inch zero-turn rider than with your old 21-inch walk-behind.
Niccoli advises doing a “true lifetime cost analysis” of the machine or vehicle you’re considering. “That includes the cost of the maintenance and replacement parts it’ll need, the per-gallon cost of the fuel and the sales tax and interest you’ll pay on the financing. That’s how you’ll see that a $30,000 piece of equipment ends up costing you $52,000 over its lifetime.”
A lot of contractors wait until the end of the year to buy equipment. If he finds himself flush with cash at year’s end, his tax advisor may say it’s time to buy something to get the write-off. But Niccoli says this is not the best approach. “You really should be able to project what your company’s going to be making in the next three months. When owners are surprised they have all this cash on hand, it just tells me they’re not managing that company, the company is managing them.” He continues, “Ideally, you should be able to say, ‘I’m going to have a surplus, so I should talk to my division leaders and crews and see what kind of stuff I should be investing in’ — instead of saying ‘Hey, now I can go get a crane!’” He saw a company do just that. “The thing just sat there, rusting away. They were trying to get other contractors to rent it from them because they couldn’t utilize it.”
Finally, before you buy any piece of equipment, Niccoli says you should have your crew members work with it. Many companies will let you demo something for a week. This helps your people get beyond the “shiny new penny” effect so you can get their honest opinions of the machine. And don’t forget to account for the time it will take to train your crew on the new equipment.
Castaneda stressed the importance of finding a reputable local dealer and establishing a relationship with him. “You need to be able to trust that brand and that dealer and make sure that you like that piece of equipment you’re buying because you’re going to be using it for a good 10 years.”
With a good relationship established, Castaneda says, “If you have an issue, he will go out of his way to resolve it for you. That is critical because for a contractor, time is everything.”
“Having a machine go down on a job site is a big deal — you’re not going to get that job done today. But if you’ve established a relationship with the dealer you bought that piece of machinery from, you could end up getting a loaner. He will even come to your job site and drop it off so you can keep working while he looks into the issue you’re having.”
What about leasing? Joe Areyano is CEO and owner of Olympic Landscape, Puyallup, Washington, a company that does design/build, irrigation, landscape installation and maintenance. It employs around 60 people at any given time and generates around $5.5 million a year in revenue.
Various financing options have been employed over the company’s long history, but the current favorite is leasing. “We’ve been primarily leasing our equipment and assets, everything from our larger mowers, stand-on mowers, skid steers, excavators and even our trucks,” says Areyano. Considering that a commercial mower typically lasts around 3,000 hours in daily use, mowing eight to 10 hours a day, or the equivalent of about three years, a three-year leasing arrangement makes a lot of sense.
“We’ve definitely changed our approach,” he continues. “It’s only been this leasing effort over the last three or four years. Before, we’d take out loans or pay cash for the assets we bought. Our larger vehicles, like our dump trucks, are primarily on TRAC (terminal rental adjustment clause) leases.”
Since taking over the business from his father who founded it 41 years ago, Areyano has expanded it by acquiring several different companies and is looking for others. Leasing helps preserve his cash while he’s in expansion mode. “A good, healthy balance sheet without a lot of debt on it definitely helps when purchasing new businesses, whether it’s with a loan or with cash,” he says. He also finds it easier to write off a leased asset’s purpose on his taxes at the end of the year.
The IRS code allows a lessee to maintain the full deductibility of a leased asset even though there’s a predetermined residual value. Only the bank gets to write off the depreciation, however.
Mac Braun, senior vice president for agriculture, golf and turf markets at Wells Fargo Equipment Finance, says, “There are tax advantages to a lease that may be applicable. What you have to do is compare that to your bonus depreciation to see which is more advantageous. In some cases, the lease is more advantageous. But that’s something you need to discuss with your tax advisor.”
Would Areyano advise leasing to a contractor just starting out? “Absolutely,” he says. I would say that for any new company leasing is definitely the way to go, especially when you don’t know what projects you’ll have in the future.”
“‘Cash is king’ is an old saying for a reason,” he continues. “You want to preserve as much cash as you can as a newer company and as an older one. Especially in your starting years, you have less access to cash and less experience in using that cash.
These days, interest rates are so good, so I would take advantage of those special financing programs.”
Another benefit to leasing is that you can prevent buyer’s remorse. You have the ability to change equipment instead of being stuck with something you may not use as much as you thought. You might be one to two years into a lease and determine you need a newer or a different machine. It’s much easier to upgrade that piece of equipment if you’ve leased it versus being tied into a purchase.
There are special programs, too, such as John Deere’s Ultimate Forgiveness Program. “We want to encourage our customers to lease, so we offer a discount on any damage a returned machine has,” says Angie Harms, tactical marketing planner at John Deere Financial. “If you’re over or under hours, we’ll forgive some of those. It’s a benefit you also get for being a return customer.”
Castaneda prefers to lease his pickups and business-developer vehicles, because “it’s better to put a bunch of miles on them, give them back to the dealer and exchange them, so you always have a newer fleet.”
I asked Ed Roberts, senior vice president, specialty markets, transportation for Wells Fargo, if a contractor would pay hundreds or thousands of dollars more for something under a lease agreement versus a purchase plan. “He would,” he admitted, but that’s not the whole story. “He also needs to look at the opportunity cost of that money.”
For example, he explains, “I can drop $100,000 to buy a truck, or I can lease it and put $3,000 to $4,000 down. If I lease it, I still have $80,000 or $95,000 with which I can fund other business options.” It may cost more to lease, he concludes, but ask yourself, “Would it be better for me to invest in a depreciating asset or go after some new business opportunity that comes up, like the chance to buy out my competitor?” To Roberts, “It’s better to use that cash to grow my business instead.”
But there’s also renting
Renting can be a good option when you need a machine for a certain job but won’t need it all the time. Then, you’d go see someone like Rex Alligood. He works at Ag-Pro Rentals in Quitman, Georgia, where he rents machinery to contractors in Alabama, Florida and Georgia.
“If it’s something like a mini excavator that they don’t use every day or a tractor with a trencher on it for a big job, they’ll rent it,” Alligood says. “That keeps their overhead down because they’re not making a payment on something they only need a couple times a year that sits idle most of the time in their shop.”
Stan Hoglund, owner of Hoglund Landscape, Fargo, North Dakota, rents equipment from time to time. “If it’s something I don’t have because I hardly ever use it, like a backhoe, I’ll go rent one just for the day,” he says.
And some landscape maintenance companies apparently rent everything they use. “We deal with quite a few landscapers that own very little equipment,” says Alligood. “Because they have the flexibility to rent things on a week-to-week basis, some of them feel that nowadays they may not need to own anything.”
Don’t forget the “used” option
This option can work well, but it’s not like it was during the recession of 2008 when lots of used trucks and equipment were available because landscape companies were liquidating their assets. Some of these were great values.
Now, the pickings are slimmer and come with higher mileage. You have to consider what a used machine might cost you in downtime, upkeep or repairs versus something brand new.
Your financing decision will depend on your company’s individual circumstances. “The key is understanding your options,” Braun says. “List all the pros and cons to help you see which type of financing would be a better fit for you.”
He adds, “If you like fresh equipment, keeping things under warranty and lower payments, then leasing is a very good option, but if you typically keep your equipment for a long time, and especially if a manufacturer is running any kind of low-interest special or rebate with a conventional loan, buying may be a better option.”
Whatever options you choose, we hope all of your equipment steers you toward a profitable, headache-free 2019.
QUICK TIP: “List all the pros and cons to help you see which type of financing would be a better fit for you.”
– Mac Braun, Wells Fargo Equipment Finance
Types of leases
When it comes to leasing, there are many different options. Mac Braun, senior vice president for agriculture, golf and turf markets at Wells Fargo Equipment Finance, explains the most common types available to contractors.
Dollar-out: Similar to a loan, you make payments, and at the end of the lease ownership is transferred to you. After leasing a $50,000 dump truck for 60 months, having already paid $49,999, you would hand over the $1 buyout fee and the truck is yours.
Purchase-on-termination: The finance company sets a residual, and you agree that when the lease ends you’ll buy it for that amount. A $10,000 piece of equipment with a 10 percent residual is $1,000. At the end you pay the $1,000 and you own it. The benefit of this type of lease is lower payments during the term.
Fair market value/operating: The finance company sets a residual, but at the end of the lease you have the option to buy or return the piece of equipment. This type of lease gives a contractor great flexibility with cash flow and is generally less expensive than other leases or conventional financing. The higher the residual the lower the payments.
Terminal rental adjustment clause: These are generally limited to over-the-road equipment. At the end of the leasing term you can buy the item for the residual, trade it in for a new model, keep the lease going by financing the residual or give it back to the bank. The bank will then sell the vehicle. Should the bank realize more than the residual amount in the sale, you’ll get a check for the difference. But should the bank not get the full residual you’ll have to make up the difference.
The author is senior editor of Irrigation & Green Industry magazine and can be reached at email@example.com.