From cranes to copiers, a construction firm needs equipment that is reliable, up to date and in good repair. You can get just about any piece of equipment, even office printers, one of three ways: outright purchase, long-term lease or short-term rental. Each has its pros and cons, and whether you should buy, lease or rent your construction equipment depends on its use, your financial situation and the needs of the job. We outline the most common advantages and disadvantages for each option below.
Buying construction equipment
Purchasing equipment is straightforward enough. You buy it, you own it. You are responsible for its upkeep and maintenance, but you can also do whatever you like with it.
Pros
- You can claim the purchase as a tax deduction.
- You can sell the machinery when you are finished with it.
- You can use it as collateral or equity.
- It counts toward the overall value of your business.
- The equipment is immediately available; you just need to get it to the site.
- It’s cheaper in the long-term (at least six years).
- If it breaks, you determine when it gets repaired and by whom.
- You don’t have the limitations of a leasing contract.
- You can make modifications as needed.
Cons
- When the equipment ages out, you need to replace it, which can get expensive.
- You are in charge of maintenance and repairs.
- You may need a loan to purchase the equipment, which counts against your credit.
- The equipment depreciates, making resale less profitable.
- You must pay to transport the equipment to the job site.
When should you buy construction equipment?
If you know you will use the equipment often and for a long time (over 65 percent of the time) and the technology is not prone to innovations, then buying gives you the security of ownership. It’s also more advantageous for companies operating at a profit and not looking to borrow money in the next couple of years. If you buy, try to wait until the end of the year, when the current year’s models are being closed out and you might get a better deal.
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Leasing construction equipment
Leasing construction equipment is similar to leasing a car. Contracts usually run three to five years, after which you may have a balloon payment or the option to purchase the machinery. The equipment still belongs to the leasing company, although it may pass on the benefits of claiming depreciation to you. The lessor is responsible for maintenance and often handles repairs, but you are responsible for keeping the machinery in good condition. At the end of the lease, you return the equipment.
Pros
- You can lease up-to-date equipment.
- In some cases, you can lease to own.
- You don't have an upfront payment.
- Leasing is often tax deductible.
- Leasing does not count against your credit.
- The leasing company maintains the vehicle.
- The leasing company usually delivers the vehicle to your work area. This is an important advantage if you take a job far from your headquarters.
Cons
- Overall prices may be higher than for buying, and you may pay interest as well.
- You do not own the equipment, so it does not give you equity.
- Leases are long-term, so you may have to keep the equipment longer than you need.
- You may have a balloon payment at the end of the lease.
- You are dependent on the lease company's schedule for repairs and replacements.
- You are limited to the leasing company's stock.
- In addition to buying insurance for the equipment, if you damage the machinery, you may have to pay damage fees.
When should you lease construction equipment?
The general rule of thumb is if you are not going to use a piece of equipment more than 60 to 70 percent of the time, you are better off leasing. Leasing also does not count against your credit, which is something to consider if you are anticipating getting a loan in the near future or are bidding on a contract where the client may check on your financial health. If you take on a project that is a significant distance from where you house your equipment, leasing may save you in transportation and remote-upkeep costs.
Renting construction equipment
Like leasing, renting gives you access to equipment, usually some of the latest models, for a limited time. Renting companies deliver to the job site and handle maintenance. Rentals are usually for shorter terms than leases and more flexible with how long you rent the equipment.
Pros
- There are no long-term commitments. If you only need equipment for a day or week, you can get it without penalty.
- The rental company handles upkeep and maintenance.
- The rental company can usually deliver to the work site.
- You can try out the latest equipment for a short term if you are considering buying.
- You don't have any upfront payments.
- Renting does not count against your credit.
Cons
- This is usually the most expensive option for long-term use.
- You don't get tax deductions or depreciation advantages.
- You have to pay insurance and may pay fees if you damage the equipment.
- You are limited to what the rental company has in stock.
- If you need the equipment longer than the rental contract states, you may not be able to keep it.
When should you rent construction equipment?
Renting is a great option when you only need a piece of equipment for a very limited time, such as with a short-term project or to take over while your usual equipment is in the shop. It's generally the most expensive option and does not offer the tax advantages, but it can give you an opportunity to try out a new piece of equipment to see if it's useful and your people like the model before choosing a long-term lease or purchase.
Whether you should buy, lease or rent depends on your finances and the equipment use. When considering the best option, ask yourself: How long will you need the equipment? Do you need the latest models year after year? What does your financial situation look like now and in the next five years – do you need equity or cash flow? Understanding your situation and needs helps you make a decision that will benefit your project and your bottom line.