Renting vs. Owning Equipment: Which is Right for Your Construction Business?

Construction companies are very expensive to start up and require a lot of capital investment. A large part of this cost is all of the heavy equipment. Trucks, loaders, excavators, lifts, generators, and the various hand and power tools essential to daily construction operations. But do you need to own that equipment, or can you get away with renting it?

For some businesses, renting equipment can be a cost-effective alternative to buying the new machinery up-front. In this article, we’ll explore the pros and cons of renting and purchasing, while also highlighting some important considerations. 

Is Equipment Rental Right For You?

Leasing equipment under a rent-to-own arrangement allows businesses to make monthly payments towards acquiring equipment while also using it. Over the course of the lease, the rental company maintains ownership of the equipment. Then at the end of the leasing period, the business has the option to purchase the equipment at a pro-rated amount. Or they can turn it in and lease a new piece of equipment instead.

Why should I lease equipment?

Leasing offers businesses a great deal of flexibility in managing their equipment needs. Do you only need a particular piece of equipment for a certain job? Nervous about owning a machine before you’ve tested it out? Are you waiting for a newer model to come out before committing to a purchase?

Leasing lets you access the tools you need now without committing to ownership for the long haul. You can scale and upgrade in a more financially-responsible way.

Speaking of finances: leasing cuts out the massive upfront expense that comes with direct purchases. This is a big advantage for new companies that are low on capital funding. Leasing also reduces total cost of ownership (TCO) significantly by avoiding maintenance and storage costs. 

Monthly costs vary depending on the lease term, the interest rate, the down payment amount, and your credit history. Keep in mind that even though leases are easier to obtain–even with poor credit or lacking cash for down payments–financing a lease often means paying a much higher interest rate than a direct purchase. 

Why should I not lease equipment?

The primary downside of leasing is lack of ownership. You’re not always going own the equipment you’re using, and you might not be able to buy it once the lease is done–not all leasing companies allow it. If you’re interested in this type of buyout, make sure it’s an option ahead of time before signing the lease agreement.

Furthermore, while leasing equipment reduces TCO, you also have less control over how well the equipment is maintained. If the owner fails to properly store or service the equipment, or a previous lessee didn’t take care of it, it could lead to mechanical problems or even accidents. 

Continuous exposure to the elements or poorly-ventilated storage space can degrade machines, and the effects might not be apparent until you actually start running them on your job site. Faulty equipment could cost you in terms of reduced revenue, reputational damage, or workplace injuries. Purchasing the equipment and handling your own maintenance gives you more control over these risks.

When Does Renting Equipment Make 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. If you haven’t built up a lot of credit, getting financing may be a bit of a challenge. Leasing allows you to access equipment immediately at a much more affordable price point.

Additionally, you can easily upgrade your equipment every few years. This makes it an attractive option for many companies–even those who can afford to purchase their own equipment. It also gives you access to more types of equipment that you may not have been able to afford yourself, which could open up more job opportunities. 

If your goal is to grow rapidly, then leasing may be the better option. 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, well-maintained equipment is an investment. You’l likely pay less per month over its lifetime than you would in a rental scenario. You can also recoup some of your investment by selling the equipment in the future. 

In order to reap this benefit, you have to commit to owning and using the equipment over a long period of time. Ownership and operating costs start high because of the steep drop in the machine’s value the first years you start using the machine. But once the depreciation starts to level off, and repair costs are still manageable, then it has enough residual value to be worth selling.

Why Should I Own Equipment?

Purchasing outright allows construction companies to have complete control over their equipment. If you’re able to properly store and maintain your equipment–and if you know that you’ll use it regularly–then ownership is a great choice.

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 isn’t available, whereas you would always have access to equipment you already own. 

On the financing side, you may be able to negotiate a better deal when buying versus leasing. Equipment manufacturers and dealers always try to provide business owners with low financing to make buying equipment more attractive. Many even offer zero percent financing over specific time periods and on purchases of certain sizes.

Why Should I Not Own Equipment?

Equipment is not like fine wine: it does not get more valuable with age. In fact, the equipment you own will only decrease in value over time. While it still may be an asset to your company long after it’s paid off, it will still continue to lose value year over year.

You’re also committing to the level of technology offered by the equipment you’re purchasing. Remember, this isn’t an iPhone that you can simply swap out and replace whenever a new one comes along. If you buy the wrong one, you might not be able to afford another. If you expect newer models of a machine to come with important upgrades, then purchasing probably isn’t the best route.

Ownership also comes with billing and tax disadvantages. Rental expenses can be billed back to the customer or deducted annually from taxes as a business expense. But buying equipment is a capital expense that must be treated as such during tax time. You can’t deduct the purchased equipment’s entire expense during the year in which it was purchased.

When Does Owning Equipment Make Sense?

Ownership is most beneficial for companies that have plenty of capital to invest in assets. By making a direct purchase, you avoid paying interest over time. This saves a significant amount of money in the long run. It’s 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. 

The decision to rent or buy isn’t one to take 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 in the long term, buying may be the way to go.