The end of the year is approaching quickly and you may be in the midst of planning your budget for 2016. If you’re looking at purchasing new equipment, you’re probably wondering about how you should acquire it. Many factors play into this decision and it can be taxing trying to decide which method is best for your particular position.
I’m going to explore the 4 options we provide and explain both the benefits and downfalls to each method. At the end of the article, I’ll provide some questions to ask yourself which will help you determine which avenue you’d like to pursue.
Buying a machine basically means converting cash to an asset on your balance sheet. This can be a good decision if your company has a healthy amount of cash and is looking to add to their assets. In owning an asset, the machine is always available to you and you are able to do with it as you please which gives great flexibility.
In terms of overall cost, purchasing for cash with be the lowest cost of acquisition because you don’t have to pay any interest and you can extend your depreciation schedule to whatever you please. If you don’t plan to use the machine very often, you can spread this cost out over a longer period of time.
Another benefit to a cash purchase is the ability to customize the machine to your own unique needs. The specifications can be adjusted for your application and once on site, you are free to customize the machine however you feel. Want to add a rockin’ stereo and a paint job? No problem, the equipment is yours to do as you please.
Laying out cash for equipment does have it benefits, but there is a downside to buying equipment outright. First off, in many cases it requires a large capital investment which is going to reduce your available cash flow. If you’re planning on a major expansion or another acquisition in the near future, this could potentially limit your ability to do so.
This method also means you are entirely responsible for the equipment including any maintenance, repairs, liabilities, and management which can be time consuming. Setting a depreciation schedule is great when you can extend it, but what happens when the machine only lasts half as long as you anticipated and it’s still sitting on your books at a high cost?
Needs of a business may also change as well and it’s difficult to change equipment when you have a lot invested into it. While buying equipment does eliminate interest costs, there are some intangible costs which can make life difficult if not properly accounted for.
Leasing is a good option when you’re looking to keep the equipment long term but you also want to conserve cash flow. Leasing is typically used as a form of financing by providing a small buyout at the end of the term and offers a lower monthly rate than a rental options. Given the current interest rates available, leasing offers the lowest monthly rate of any method of acquisition. Operating leases can be offered under certain circumstances and can be tax deductible.
Leasing makes acquiring new, more expensive equipment available to more companies, especially when cash is tight and allows you to run higher quality equipment which will be less likely to require repair. The accounting and budget management is simplified by only having one payment to think about.
Does your company have a solid credit history? If you’re new in business or you’ve gone through some rough financial times, you might have trouble qualifying for a lease. In some cases, you might be approved but the terms will not be favorable given a high interest rate or significant down payment.
Leasing also requires commitment to a set term with limited to no options of early cancellation or payout. This can make changing out equipment difficult as your business requirements change and new variables are added.
While leasing offers the lowest monthly cost when compared to the next 2 methods, there is still a cost to borrowing money. You’re also still obligated to pay even if you’re not using the equipment. If times are tough and business is slow, the lease rate continues on at the same rate no matter how much revenue you’re bringing in.
When you’ve got short term equipment requirements and need flexibility, renting is the way to go. This option allows you to use only the equipment you need, for how long you need it. If your needs on the job change, you can call off the rental or change to a different machine usually within a day or two. The machines are typically available on short notice and you don’t have to worry about any storage or warehousing costs while the equipment isn’t being used.
Most rental machines also include planned maintenance if you’re working on a local site. This reduces maintenance costs and eliminates one component you need to plan for. Further to this, downtime is also significantly reduced by operating a new rental fleet. 88% of Leavitt Machinery’s rental fleet is model year 2012 or newer so you know you’ll be renting a quality machine which won’t be breaking down and costing you money.
Renting also allows you to cut capital costs and instead, operate equipment as a monthly expense. This not only increases cash flow, but can also have significant tax benefits at the end of the year. The monthly expense is adjusted depending on the duration of the rental, further reducing monthly costs which will benefit your bottom line.
Convenience comes at a cost; this is why a short term rental is typically the most expensive option over time. This can be reduced when renting over a longer period of time, but it won’t come close to a capital lease when looking at a longer term. The monthly rental payment also builds no equity so, while you’re taking advantage of the tax benefits, your balance sheet’s asset value will not improve.
When the economy is booming and projects are starting, rental equipment availability can be limited and isn’t always guaranteed. This means you might have to settle for a machine which is one size smaller or larger than what you originally intended. Specialty requests can be difficult to find depending on the machine required and specs might not always be an exact match to what you requested. This isn’t always the case and exceptions can be made in certain circumstances, but it’s not always guaranteed.
If you have a special situation where a specific machine is required, let us know here and we can work through the options and create a solution for you.
Our fleet management program offers the tax benefits of renting, with the customization capabilities of buying or leasing. This method has been developed by Leavitt Machinery as a comprehensive way to reduce total operating costs and is tailored specifically to each customer’s application.
With this program, the responsibility to manage your equipment is on us and in return, you pay one monthly payment for easy budgeting. This also eliminates the risk of unforeseen costs such as improper depreciation, major component failure, lost productivity, and unexpected maintenance repairs on old equipment.
Similar to renting, fleet management is a fully tax deductible operating expense however; this method can accommodate specialty equipment required for unique or specialized situations. Cash flow is conserved, and you are able to operate the latest technology without any carrying costs for your equipment.
The rates are typically less than renting as they are adjusted to meet your specific usage and they can also accommodate a number of different options. Some of these items include equipment maintenance, annual nondestructive testing (NDT), tire replacement, battery replacement, extended warranties, and even custom attachments for your machine. Managing equipment probably isn’t your core business, Fleet Management takes this responsibility off your to-do list and allows the experts at Leavitt Machinery to take care of it all for you.
As with any method, there are some downsides to fleet management. First of all, you must commit to a given term. This is usually determined with the help of your account manager by determining the optimal turnout time for each specific piece of equipment. In an application where the machines experience a higher utilization, the term will be shortened and thus a higher monthly rate will be applied. While this will reduce total costs over time, it can be a bit of a shock if you’ve been using a longer depreciation schedule prior to this.
With this method you also don’t build equity in to the machine, similar to renting. With that being said, the goal of the program is to reduce your total operating costs of your equipment by taking into account the cost of buying, depreciation, maintenance, and intangible costs. So while this may seem like a downfall at first, your total costs will be decreased over time and you won’t need to dish out the capital for equipment every year.
While every option has their pros and cons, the fact is the right method will ultimately depend on your own unique situation. When deciding on a method, dig deep and ask yourself questions to find the best fit:
These are just a few questions to ask but they will help drill down and determine which method is the best fit. A customer in a highly volatile and unpredictable business might prefer short term rentals whereas a company with strong mechanical abilities and a healthy cash flow will prefer buying. In the end, it all depends on your situation.
Every business is unique and has their own distinct needs. No matter which method you choose, it’s important to work with a company who understands this and can develop a plan which works for your situation.
If you have questions or would like further information on the described methods, give us a call and one of our trained account managers will be happy to help or you can leave a comment below. If you enjoyed the post, I always appreciate help from my connections to spread the word by emailing it to a friend, or sharing on Facebook, Twitter, or LinkedIn.