When you accept a job that requires equipment you don’t have on hand, should you bill the customer for the new rental cost? We hash out the pros and...
Renting vs. Owning Equipment: Which is Right for Your Construction Business?
They say you’ve gotta spend money to make money—and that’s especially true in the construction business. The overhead to start a construction company of any kind is astronomical, due in large part to the high cost of heavy equipment. Trucks, loaders, excavators, lifts, generators, and other implements are essential to daily construction operations. But do you really need to own that equipment?
For some businesses, renting equipment can be a cost-effective alternative to forking over the cost of new machinery upfront. In this article, we’ll explore the pros and cons of renting and purchasing and highlight some important considerations as you weigh your options.
Is Equipment Rental Right For You?
Renting (a.k.a. leasing) allows businesses to make monthly payments toward the acquisition of equipment while using it. Over the course of the lease, the rental company maintains ownership of the equipment. At the end of the leasing period, businesses sometimes have the option to purchase the equipment at a prorated amount. Or, they can turn it in and start a new lease with a new piece of equipment.
Advantages of Leasing Equipment
Leasing offers businesses a great deal of flexibility in managing their equipment needs. Only need a particular piece of equipment for a certain job? Nervous about jumping into owning a machine before you’ve tested it out? Want to wait for a newer model to come out before you purchase? With leasing, you can access the tools you need now without committing to ownership for the long haul. That way, you can scale and upgrade in a more financially-friendly way.
Speaking of finances: Leasing cuts out the massive upfront expense that comes with buying outright. This is especially advantageous for new companies that are low on capital funding. Leasing also reduces the total cost of ownership (TCO). By avoiding maintenance and storage costs, you’ll keep overhead to a more manageable level.
According to CostOwl, “A standard rate for leasing business equipment is $40 to $60 per month for every $1,000 purchased. At this rate, a $5,000 machine will cost you $200 to $300 per month, while a $100,000 machine will run $4,000 to $6,000 per month.”
Monthly costs vary depending on the lease term, the interest rate, the down payment amount, and your credit history. And keep in mind that even though leases are easier to obtain—despite poor credit or lack of cash for a big down payment—financing a lease often means you’ll pay a higher interest rate compared to financing a purchase.
Disadvantages of Leasing Equipment
The primary downside to leasing is the lack of ownership. At the end of your lease, you won’t own the equipment—though, as explained above, you may have a chance to buy it at a prorated price. If you are interested in this type of buyout, make sure it’s an option before you enter into the lease agreement.
Furthermore, while leasing equipment reduces TCO, you have less control over how well the equipment is maintained. Suppose the owner fails to properly store or service the equipment. That could lead to mechanical delays or even accidents. Continuous exposure to the elements or poorly ventilated storage space can degrade machine quality, and the effects may not be apparent until you actually fire up the machine on the job site. Issues with faulty equipment could cost you in terms of both reduced revenue and reputational damage. Purchasing the equipment and maintaining it yourself gives you more control over these risks.
When Renting Equipment Makes Sense
Leasing definitely makes the most sense for businesses that don’t have a lot of cash on hand. Direct purchases often require large down payments—and if you haven’t built up a lot of credit, getting financing for the rest may prove difficult. Leasing allows you to access equipment immediately at a much more affordable price point.
Additionally, it allows you to easily upgrade your equipment every few years, making it an attractive option for many companies—even those that could comfortably afford to purchase their equipment. It may also allow you to access more types of equipment than you would if you paid the full cost of each tool upfront, and that could open you up to accepting more jobs. If your goal is to grow rapidly, leasing may be the better option because you can focus your spending on other growth resources—like labor and marketing.
Is Equipment Ownership Right for You?
Owning equipment is a long-term commitment. When you purchase a piece of equipment, you assume responsibility for all upkeep and maintenance costs. However, a well-maintained machine is an investment. Over the life of the equipment, you’ll likely pay less per month than you would in a rental scenario. You can also recoup some of your investment if you decide to sell the equipment at some point in the future.
But to reap this benefit, you must commit to owning and using the equipment for the long haul. As explained in this Construction Equipment article, “Ownership and operating costs start high because of the steep drop in the machine's value (depreciation) the first years the machine is in use.” However, the financial benefits of ownership will kick in once “depreciation has started to level off, and repair costs have not yet begun to rise steeply.” At this point in the equipment’s life cycle, “its residual value remains decent . . . before major repair expenses are necessary.”
Advantages of Owning Equipment
Purchasing outright allows construction companies to have complete control over their equipment. If you are able to properly store and maintain your equipment—and if you know you’ll use it regularly—then ownership is a great choice. According to Utility Contractor Magazine, “In general, you should buy the equipment if you need it for more than 60-70% of the duration of the project(s).”
Ownership also gives you greater control over your schedule. Competitors who are beholden to leasing companies may not be able to take certain jobs if the equipment is unavailable, whereas you always have access to the equipment you own.
On the financing side, you may be able to negotiate a better deal when buying versus leasing. “Equipment manufacturers and dealers are working to provide business owners with low financing to make it more attractive to buy equipment,” this Construction Business Owner resource explains. “Many dealers/manufacturers are even offering zero percent financing over specific time periods and on purchases of certain sizes.”
Disadvantages of Owning Equipment
On the other hand, equipment is not like fine wine; it does not get more valuable with age. When you purchase, the equipment you acquire will only decrease in value over time. While the equipment may still be an asset to your company after it is paid off, it’s important to understand that it will lose value year over year. You’re also committing to the level of technology offered by the equipment you are purchasing. If you expect newer models to come with upgrades that you’d rather not live without, then purchasing probably isn’t the best route.
There are also billing and tax disadvantages to ownership. As explained in this Construction Business Owner article, “Rental expenses can be billed back to the customer or deducted annually as a business expense. Buying a piece of equipment, however, is a capital expense that must be treated as such at tax time. You can't deduct the purchased equipment's entire expense during the year in which it was purchased.”
When Owning Equipment Makes Sense
For companies that have plenty of capital to invest in assets, ownership makes a lot of sense. By making a direct purchase, you avoid paying interest over time, thus saving a significant amount of money in the long run. This is especially true for heavy construction equipment that comes with fewer high-tech features, because the rapid pace of technological advancement won’t greatly affect the equipment’s future value.
If you do decide to purchase, we’d highly recommend implementing a business-focused GPS tracking solution to protect against asset loss due to theft. Even if you have a great insurance policy, it won’t make up for the lost job opportunities—or damaged reputation—that may come with suddenly losing access to a crucial piece of equipment.
The decision to rent or buy is not one to make lightly. It’s important to carefully consider your business needs and goals before opting for one strategy over the other. For construction businesses looking to reduce upfront expenses and grow quickly, renting might be the better option. For more established businesses that want to use equipment long term, buying may be the way to go.