Renting, Leasing or Purchasing Equipment

In the day-to-day operations of a contractor, numerous pieces of equipment are typically used, and the decision between purchasing or leasing can be a significant factor in those businesses.

For example, a plumber may need a backhoe to bury pipes or dig up septic tanks, an HVAC technician may require a crane to install air conditioning units, or an electrician may need a trenching unit to lay underground wires. There are numerous reasons why you may need equipment, which leads to the question of the hour: Rent, Lease, or Buy?

To answer a similar question for vehicles, check out this blog post: https://www.waterfordbusinesssolutions.com/leasing-vs-buying-vehicles/

Renting: Short Term Solution

Renting equipment is usually the best choice for equipment that you will only need for a short period. For many of our contractors who primarily focus on residential work they may need specialized equipment for the occasional commercial job. For example, an HVAC contractor who would not normally need a crane may need one for a commercial client.

In this case, it would make more sense to rent the crane for a few hundred dollars rather than lease it for a few thousand or buy it for tens of thousands. It is not worth the investment and maintenance for long-term use if it will only be used occasionally for a few hours.

Renting will be more expensive because the owners purchase and maintain the equipment, requiring a profit to make the risk of renting worthwhile.

Leasing: The Middle Ground

Instead of outright buying, leasing equipment is a good middle ground between purchasing and renting. In a lease scenario, you do not own the equipment, and at the end of the leasing period, the equipment will be returned to the owner. This means that you do not need to consider factors such as diminishing value, long-term maintenance, depreciation, or taxes.

In fact, some lease contracts include a maintenance clause, where the owners provide maintenance to ensure the equipment remains in acceptable condition. However, the fact that it returns to the owners at the end of the lease can also be a negative. If you rely on this equipment for everyday operations and decide not to purchase it, you will need to sign a new lease at the end of the term.

To mitigate this issue, a special type of lease exists known as a buy-out lease. In this scenario, you would pay the lease payments, just as with a normal lease. However, at the end of the lease term, there would be an option to purchase the equipment at a heavily discounted rate. These agreements are similar to purchase agreements, but with a higher monthly rate.

For example, a purchase agreement might have an interest rate of 3-5%, while an equivalent buyout lease would have an interest rate of 5-8%. It should be noted that these buy-out leases are easier to obtain than a purchase agreement because the payments are totally secured by the equipment being leased.

With any lease, these payments are considered expenses, and you will not receive any tax benefits associated with equipment ownership – including standard or special depreciation. However, the expenses themselves will affect your bottom line, which will lower your taxable income. The biggest disadvantage is that you will not have the equipment asset on your balance sheet.

This can make your company look less healthy on paper because you do not own the equipment asset, and you are regularly spending cash for its use. Despite these disadvantages, it is worth noting that there is an advantage we haven’t mentioned yet – consistency. You are certain exactly what your monthly expense for this equipment will be.

Purchasing: The Big Commitment

When purchasing equipment, you do have that equipment asset on the books, which means you also have depreciation tax benefits. These benefits should not be ignored as they can be a great boon towards tax time. For more information on depreciation, refer to Publication 946, available here: https://www.irs.gov/publications/p946.

If you own the equipment, you must consider maintenance and upkeep, an additional overall cost that many seem to forget about. However, maintenance should not be ignored or delayed, because if you own this equipment, you want it to remain useful for as long time as possible. We have clients who own dump trucks that have been on the road for 20 years and backhoes that are 30 years old, all because they prioritize maintenance.

Even though purchasing incurs more upfront costs, in the long term, you will have a freed-up cash flow because you have a well-functioning piece of equipment that you no longer need to pay for.

Most of the time, financing is the best option, as long as you plan to keep an asset for the long term and are not planning to constantly upgrade it. Depending on your credit and other circumstances, you may be able to finance at a lower rate than you could lease. However, the payment amount may be higher due to a shorter loan term than the leasing period causing a higher total cost.

Purchasing, as mentioned above, can be more difficult than leasing if you require financing. Not only will they require more financial information on the business, but sometimes the business (especially a small business) may require a personal guarantee from the owner to receive financing. These precautions are due to the fact that it is much more difficult for the lender to recover the equipment if you default on the loan, even when the loan is secured by the equipment.

Buying in cash has another benefit that is not strictly financial: the peace of mind that comes from not owing money to someone else. We have many clients who are averse to debt, so when they need equipment, they save and buy equipment outright. Meaning they have all the rights and no obligations, allowing them to do whatever they please with their property.

I hope you found this informative! If you need help or would like a better understanding of your business’s current state, we’re happy to assist you here at Waterford Business Solutions through an initial consultation. Give us a call to talk about what we can help your business with at 864-351-0852, or shoot us an email at info@waterfordbusiness.com, and we’d be happy to help you!