Heavy Equipment Leasing: What to Consider
Equipment leasing is an essential part of doing business in nearly any industry. Whether you are operating a food truck or are furnishing a satellite office for a Fortune 500 company, equipment leases and financing options allow you to preserve your business’ cash flow and working capital while expanding your scope, adding new services, or replacing old and broken equipment. Heavy equipment leasing or purchase, what is the best option for you? But industries that require heavy equipment often face the most severe equipment costs and may have no choice but to lease heavy equipment or seek a loan to purchase used equipment.
Construction, excavation, and large-scale manufacturing are just a few industries where heavy machinery and equipment are central to keeping things running, not just within the company but often within a larger supply chain or local economy. Choosing the right equipment, the right lease, and the right leasing partner are all important factors in a good leasing deal and can mean the difference between going under in debt and becoming a successful business.
Why You Shouldn’t Buy Heavy Equipment Outright
Heavy equipment is the prime candidate for equipment leases because heavy equipment is often costly. While a whole suite of office equipment or a fully-furnished restaurant kitchen carries hefty costs as well, heavy equipment – from bulldozers to cranes, forklifts, bespoke factory machines, automated manufacturing systems, and more – will have more significant price tags. Even if your business can afford the 10-30 percent down payment on a new bulldozer or cement mixer, that’s a hit to your working capital that you don’t need to take.
In the construction business especially, certain equipment can be of much better use to you via a short-term lease or rent agreement for one or two jobs, rather than a purchasing agreement, where it might spend as much time on your company lot as it will out in operation. Being a full owner of specific heavy equipment also comes with significant risks. Ownership means the burden for repairs and maintenance falls to you. When leasing heavy equipment, on the other hand, most leasing companies offer maintenance costs and repair costs for wear-and-tear as part of the package deal within the lease (albeit with limitations as to where and how you can seek repairs).
Heavy Equipment Leasing or Financing?
Leasing your equipment eliminates the need for a significant down payment (in most cases), avoids the burden of full ownership, gives you the flexibility to lease equipment on an as-needed basis, and allows you to improve your company’s credit history for future lease agreements. Another important benefit of leasing used equipment is a robust and complete service history. If you are opting to seek an equipment loan for a used excavator with no apparent history, you may be getting a great price tag for a piece of equipment that is certified and functioning but could quickly net you a hefty repair bill on its first day out on the job.
When leasing heavy equipment, including used heavy equipment, the burden of maintenance and repair is on the owner, who will likely maintain a meticulous service record to ensure that the equipment is in good shape. After all, you aren’t buying a machine – you are hiring its services. Leasing also has certain tax advantages. Owning equipment lets, you deduct the amount by which the equipment’s value decreases over the course of its useful life (usually five to seven years) as a result of asset depreciation. Your asset becomes worthless over time. But when leasing, you can write off each lease payment as a business expense.
New or Used Heavy Equipment?
Obtaining heavy equipment, used or new, will depend on the type of equipment you intend to acquire. With specific equipment, the only real difference between new and used equipment is the mileage on the motor and its original parts and its life expectancy versus its price. Lots of heavy equipment is built to be used for more than five years. Some equipment is best owned new, especially if the energy or fuel efficiency and safety improvements made over the last year are a strong argument for newer or new equipment versus used. Then there’s the issue of image. The new equipment will look better than the used equipment, which you shouldn’t underestimate.
Promotional material featuring new equipment will give your company a better image than mismatched used equipment throughout the factory or construction site. This can inspire better trust and confidence in would-be clients. On the other hand, used equipment will provide a better bang-for-buck. Some heavy equipment may feature a hefty discount despite minimal mileage and fewer than a hundred work hours, perhaps as part of a different company’s flash sale or dissolution. Keep an eye out for opportunities within your local market, and work with your leasing partner to find the best deal for your company.
Buying Leased Equipment vs. Negotiating a New Lease
When leasing equipment, new or old, there will eventually come a time when the lease ends. It might be six months from now or sixty months from now. When that time comes, you will need to decide how to continue. Should you own your leased equipment outright? Or negotiate a new lease for newer equipment? If you decide to own your leased heavy equipment, you may pay only a nominal fee (if you’ve paid more than the total value of the equipment over the course of the lease) or the remainder of the equipment’s worth.
The benefit to full ownership is that you no longer have any lease payments to worry about and can still enjoy the rest of the equipment’s useful life – equipment you’ve worked with for years, meaning there are fewer risks involved. But if your equipment is nearing the end of its usefulness towards the final days of the lease, it makes more sense to start a new lease agreement and pick new heavy equipment. In some cases, it’s safer and more profitable to lease upgraded or newer equipment than to spend another five to ten years on an outdated piece of machinery.
Seeking a Leasing Partner
Deciding to lease equipment is one thing. But finding the right leasing partner can be difficult. It is not just a matter of shopping for the right equipment and the right deal – it is also about establishing a long-term relationship with a leasing partner and organizing the necessary prerequisites to secure your equipment. When entering the leasing market, take care to:
- Carefully determine your monthly budget per equipment.
- Organize and present your current financial information.
- Prepare your credit history and receive a professional credit report.
- Present your business plan for current and upcoming future projects.
Your lease options and terms will depend on your company’s financial viability and history as a lessee.