Buy or Rent?
How do you make the wisest financing schedule?
How do you make the wisest financing schedule?
By Paul Hull, Contributing Editor
Most people I have spoken with over the years about renting have said it should not be perceived as a method for avoiding payments because business is bad and times are difficult. The more people you talk to, the more opinions you get. In this article I discuss financing equipment, not buildings. Many contractors like to own their equipment and it is a preference that reflects their innate independence and confidence. There are, however, times for both contractors and utilities when it seems cash has better uses than new equipment purchases, and renting becomes the advised approach because it offers the flexibility required-especially for a one-time, special project that will be profitable but not lasting.
Other circumstances that might prompt the desire to rent could be an uncertain business climate for the immediate future, a necessity because of a third parties' conduct-such as slow payment for work or a better investment opportunity for available money. The options offered to potential owners are usually buy, lease or rent-and there are options within these options. It comes down to the fact you can get the equipment you need, whether it's for your daily work or a special project, because excellent equipment is available. In recent years, borrowing has involved stricter lending rules, and we have been told the whys and wherefores repeatedly by the media. You can, however, still buy or rent good equipment, new or used, if you can demonstrate your need for it and your ability to pay. Renting equipment is not an escape route from mismanagement; it is a practical solution to an immediate problem. A purchase option you should not dismiss as somehow inferior is the acquisition of equipment through an auction. Don't perceive auctions as sales for inferior or lesser companies; there is a wealth of excellent, used equipment-some of it used just for one project-available at auctions. Auctions for commercial equipment should not be confused with garage sales where someone is trying to dispose of poor, broken or obsolete property.
There can be helpful tax breaks for acquiring equipment. Don't miss them simply because you don't know about them. Your best advisor for the purely financial aspect of the buy-rent-lease equation is an accountant who knows your business. That might be you, your company's official accountant or accounting department, or a financial expert you consult on matters beyond your expertise. If you don't have such an accountant, you should find one. Whatever intricate, job-related aspects there are to your situation, the financial challenges must be met and solved. Let me stress again the value of consulting with a true financial expert. I am not such a person, but I have observed various financing scenarios that would include your business situation. If you are just starting, your needs and solutions might be different from those of an established company that is contemplating expansion.
For growth, asset-based lending is a term heard and seen. It's a fairly general term and refers to the situation when a lender will accept the assets of an existing, working company in exchange for a loan. If you have strong accounts receivable-as a utility may expect-an asset-based loan for financing expansion and growth is a promising source of financing. It is viewed favorably by lenders because it is usually a short-term contract and has fewer associated peripheral problems. Get the most accurate information about asset-based lending from your accountant. Also ask about factoring, where a company's receivables are-and every other method. Historically, asset-based loans have been successful when a company's growth is so rapid that growth tends be faster than the collection of receivables. Other types of financing that might be relevant to the question of buying or renting are lines of credit, loan workouts and even letters of credit. These are all financial solutions that should be addressed by financial experts rather than a colleague who thinks he or she knows-or someone with a general rather than particular knowledge of financing, such as me!
Finding Affordable and Good Equipment
Companies, whose main business is renting equipment to customers, will assure you that renting equipment provides a tremendous economic benefit. When you rent equipment, you spend money only when and where you need the equipment. When you finish the project, you send the equipment back, returning the responsibility and expense. Equipment that sits idle can be very, very expensive. Would you hire new employees when there is nothing for them to do for days, weeks or months? Renting equipment also can mean you get the best equipment for the job because you can match everything to suit the project, specify exactly what you need and when you need it. Not only do rental customers receive the assurance of a well-maintained machine, they also avoid the hassle and expense of servicing and maintaining the equipment.
Seldom mentioned in national discussions but of major importance to businesses in thousands of smaller communities is the exact equipment-that well-maintained, well-serviced product emphasized by rental companies-may not be available locally. Rental fleets have an average life span of five years, making them younger, less prone to problems and more environmentally sound because they emit fewer emissions than older diesel engines. You might be able to locate what you really need at a location more than 100 miles away, which will increase the rental cost. It can, however, still be more practical than purchasing the equipment for one-time use.
What can a rental company provide? Just a machine? Just a piece of equipment you need today? Only small machines? One consideration rental companies would like contractors to be aware of when calculating the best way to keep crews supplied and busy is how much the rental company can provide. Is the rental company's price more than it would cost to do everything yourself, such as maintaining the equipment? Can you do that better than a rental company with its team of technicians? Is the extra in rental cost worth the difference? Maintenance technicians is one cost of ownership contractors may ignore or neglect.
One objection to renting from companies with national or international manufacturer names has been that the customer is too limited in equipment choice. That may be a misconception. Caterpillar and Volvo, for example, have rental stores, but they rent much more than their own proprietary equipment. Do the same homework you would do if you were buying outright. Check the provider. Check what is available. Check the terms, advantages and disadvantages of acquiring the equipment. Both purchasing and renting are good ways to own equipment; the homework responsibility to find the better way is yours.
Flexibility From Financing
Who profits when you acquire equipment? Proponents of renting or purchasing have many arguments about why their method is best because it is what they sell and what makes their business succeed. It is common sense to evaluate all the options with as clear a mind as possible. A friend of mine, the president of a bank with some 30 branches, assures me banks do not like the low rates manufacturers sometimes offer their potential customers.
"A bank cannot afford deals with zero percent financing," the friend commented. "Lending money is our business, but we must profit by doing so. In the last few years we have seen incredible deals from manufacturers of all kinds of equipment, not just cars and trucks. They have proposed financing that is not in our best interests to challenge."
If you grew up with the belief that purchasing through a financial program meant you would be arranging everything through a bank you knew well, you might be surprised by some of the arrangements being made today. Some of them are excellent deals and not necessarily directly from banks.
One interesting statistic is that financing-which is always more costly than a cash transaction-is more common for contractors who have multi-million-dollar businesses than for the thousands who do not.
At this time, leasing is probably still more expensive than purchasing. Some of the timing advantages leasing offers, however, benefit those who can organize their work schedules to accommodate them. If you can find a leasing agreement that gives your business flexible terms and the chance to trade the current lease at a future date for new equipment, the additional and overall cost of leasing might be less than you imagine. Such an arrangement could be a good way to upgrade your equipment with little effect to your cash flow.
There is equipment available, and there is a way for you to acquire it. Is there a best financing method? The more you research this issue, the more you feel the question is like asking if there's a best color, a best song, a best vehicle or a best anything. The best financing-which may be no financing from outside sources-is the option that is best for you and your company today. All the favorite options-renting, bank financing and leasing-have their fans, but you will probably find the best method may be quite personal and particular; it is the financing that suits your exact needs at an exact time. For this month's biggest project, it might be renting. For next year's daily work, it might be bank financing. The best method for you exists; it's simply finding it, and that almost certainly involves asking someone who knows all the options and advantages, which brings us back to consulting with a good accountant.