The next time your business needs new equipment, you may be asking yourself whether you should lease it or purchase your own.
Alas, this question calls to mind an unending series of other questions – can your company afford to pay the heavy upfront cost of brand new equipment? If not, is your business secure enough financially to take on the monthly payments to pay for new equipment? Would you rather dodge the expensive up-front ownership costs and pay smaller, more feasible lease payments? Will it end up costing you more in the long run? The list of questions goes on and on…
To help you sort through the headache-inducing decision making process, here’s a list of the pros and cons of both buying and leasing equipment.
Leasing Pros:
The initial price
This is the most obvious benefit of leasing. Equipment is one of the biggest expenses for landscape contractors. With minimal cash outlay, you can save your money and put the fortune you would have spent on new equipment into other areas in your company. With leasing, payments are simple to implement into your company’s operating budget. Maintaining good cash flow is critical for a growing business. Leasing is a great way for a growing business to expand capacity (sales) with minimum stress on operating cash flow. After all, when it’s all said and done it’s the use of the equipment rather than the ownership of the equipment that leads to profit.
Newer Equipment, Better Uptime
There’s an old “formula for success” in the contracting industry – own your own equipment, and you can be financially successful. Certainly there’s some truth to this, but there are risks as well. The number one risk is that many owners see owned equipment as “free” and don’t include equipment costs in their estimates. Eventually, the equipment needs to be replaced, but the owner hasn’t been saving any money (or recovered any costs) for their equipment. Now they need to run their older equipment longer, until they can save up for something newer. When you run old equipment, there are several costs that far outweigh the interest costs on new, financed equipment:
- Repair Costs – older equipment requires more frequent, and expensive, repairs
- Higher Operating Costs – older equipment is less efficient
- Downtime + Lost Productivity Costs – this cost is the real killer. Older equipment leads to more breakdowns, and more downtime. When you’re equipment is down, your labor costs go up, your job productivity slows right down, and the jobs you estimated with equipment suddenly aren’t profitable anymore because your crews are having to do machine work now by hand. Reduced productivity not only eats up profit on the jobs you’ve sold – but slower jobs means you can’t sell as many jobs, so you also lose valuable sales/billing opportunities.
The combined costs of higher repairs, higher operating expenses, and reduced productivity typically far outweigh the costs of interest on financed equipment. Take a careful look at your business to ensure you’re not running equipment that is constantly costing you more than its worth.
Cutting edge equipment
Stay on top of emerging industry trends with state-of-the-art equipment. Leasing provides you with the opportunity to upgrade your equipment accordingly, and as new gear hits the market and your company continues to grow, you’ll appreciate the access you have to the best technology. New equipment and technology improves your productivity – which means you can price your work more competitively and/or more profitably. With leased equipment, you can also respond more quickly to shifting business demands and market needs by changing the type of equipment and the amount you lease.
Predictable month expenses
Lease terms are negotiated upfront on an individual basis and, in most cases; terms are as flexible as required. With lease payments, you know your equipment is an affordable and expected expense.
Low downpayments
Many equipment leasers offer very low or no down payment plans so be sure to inquire about their payment options.
Established companies like Caterpillar® offer contractors great equipment with financing plans that can suit almost any budget.
Check out the Caterpillar website
Win the job on productivity, not price
With equipment at the forefront of technology, it not only helps you get the job done, but it will get the job done faster, with less people. Companies that are equipped with the right equipment can win jobs on price – not because they make the least profit, but because they can do the work most efficiently. The right equipment, work tools and operator, can out-produce an entire crew – in less time and for less cost.
Tax Deduction
Leasing costs are a tax deduction. Consult your accountant or financial professional for advice based on your local tax laws and regulations.
Leasing Cons:
Pay more in long run
Leased equipment is generally (not always) new equipment and therefore you are financing the equipment during the period where it depreciates in value the most. As a result, leasing new equipment often has the highest ownership costs. Another downfall – with leased equipment, you don’t own it, so you have no built-in equity.
You still have to pay for unused equipment
Another contributing factor to the cost of leased equipment is the money you end up paying while your equipment is sitting unused during slow times. If you lease equipment for only 1 season of the year, it’s very important that you understand your operating costs and that your pricing is calculated to recover those costs and a profit. A contractor who has an excavator that works 150 hours a year will have very different costs than a contractor who uses an excavator with 1000 billable hours per year. You need to know your costs, and set your rates accordingly. Landscape Management Network’s budgeting, pricing, and estimating tools will take you step-by-step through calculating the costs, and appropriate rates for your equipment.
Buying Pros:
Easier than leasing
There are no agreements, no negotiations and no contracts to sign. You aren’t bound to a specific residual value or term and the equipment is easier to sell if you own it outright.
You determine whether it needs maintenance or not
There are no mandatory maintenance or repair costs, as specified by some lease agreements. Only you judge when your equipment is due for some TLC.
Tax Benefits
As the owner, you can declare capital allowances.
Buying Cons:
Heavy price tag
When you buy a new piece of machinery, you have to pay the full cost of the investment up front – an undertaking many businesses simply can’t afford to do unless they take out a hefty bank loan. Even if you can afford the equipment, you tie up a lot of capital, that could be used elsewhere in your business (advertising, new hires, early payment discounted pricing from vendors) to help you grow your profits.
Stuck with dated equipment
When you purchase a piece of equipment, there’s no upgrading to the latest model once new technology streams in. You’re stuck with what you buy until you decide to re-sell it.
Read Part II of the Great Equipment Debate: Buying Used Vs. Buying New.
