Rent Smart: Rent, lease or buy?
| January 01, 2008
Chances are, you’ve made the rent, lease or buy decision several times by now. But what makes one alternative trump the others? Not everyone’s financial situation and rate of use will be similar, so experts offer a few tips to help determine whether you’re in it for the long – or short – haul.
Renting done right
“Renting is generally the best option unless a machine is being used more than 60 percent of the time,” says Fred Ransom, Northeast region vice president, United Rentals. “With renting, virtually all the costs of owning equipment are absorbed by the rental company instead of contractor.”
The contract period for rental provides the most flexibility – you can get rentals for a day, week, month or up to a year, says Gregg Zupancic, product marketing manager for John Deere’s construction and forestry division. “The longer you rent, however, the more the economic benefits diminish.”
Still, on the upside, all long-term maintenance, repairs, parts, storage and insurance costs are on the rental store. “The customer’s capital is preserved for other, more profitable uses,” Ransom says.
If you experience breakdowns, most rental companies have 24/7 assistance. For instance, says Nick Mavrick, vice president of marketing, strategy and sales for Volvo Rents, his firm will replace a faulty machine with another upon customer request.
Another good reason to rent: It ensures the correct machine for each job, because you can choose the most productive, “best fit” model each time, Ransom says. Plus, you can receive operator training.
Rental also provides contractors with the option of obtaining more equipment to power through the job quickly. It may cost more to do so, but finishing on time or even ahead of time has its benefits. You can forget worrying about delays, and you have a better chance of ending up with referrals or repeat customers.
Key point: “Renting can give you all of the advantages of owning, without the costs or responsibilities of ownership,” Zupancic says.
Lease and still keep payments low
For those who see rental as what it really is – a short-term transaction – and need something more, leasing can be appealing because it’s more long-term.
Much like financing through a loan, you’ll have monthly payments, but instead of calculating a depreciation method on your own, the leasing party will figure the equipment’s cash-value depreciation into the cost of the lease.
So if you intend to use a piece of equipment for a few months, but don’t want the big upfront capital associated with owning and then later possibly dealing with resale, leasing offers a good financial alternative.
Other advantages of leasing include the opportunity to reduce operating expenses by replacing old equipment without spending a lot of money on a new piece of equipment. This way, you can establish realistic replacement schedules, Zupancic says.
Key point: Obtain what you need through leasing when you can’t afford to purchase a machine, but want to use it for more than a short period of time.
Of course, if you use a piece of equipment and maintain that level of usage for a period of time, buying may be the way to go. “Buying allows you to build equity in the equipment,” Zupancic explains.
For those who can’t dole out cash for new equipment, Mavrick suggests obtaining it through financing. Loans trump leases if you want to own, since equipment leases can cost more in the long run.
If ownership still scares you, ask a dealer or rental store about using a rental purchase option. A percentage of the rental payment – agreed to upfront – is applied toward the purchase. “This financial structure helps you buy the equipment with less of a time commitment than a lease,” Mavrick says.
Payments for this type of agreement will differ by customer. Customers should first request a price for the piece in question. “Say you wanted a backhoe for three years and could purchase it for $40,000,” Mavrick says. “If you rented it for a year, it may cost $20,000. Renting it for three years would add up to $60,000. You should negotiate the rental purchase option between the purchase price and the rental price.”
Usually, the dealer or rental store will meet you somewhere in the middle. “This sort of ‘let me try it before I buy it’ option lets you test out the equipment for three to six months, and then decide whether to buy. If you choose to do so, the rental store or dealer will credit back the price it cost to rent for that time toward the purchase price,” Mavrick explains.
As for a straight purchase, cash purchases made with funds from working capital may be the lowest cost method. Service fees, finance charges and interest expenses are eliminated. Still, you have to consider that the money you use will not be available for other company expenses.
When you buy, you should also work with an accountant or financial expert to determine your equipment’s depreciation schedule. Depreciation methods differ by asset class, Mavrick says, and states have different rules for tax purposes.
Private companies usually go for shorter-term depreciation, such as five-year periods, since they want to minimize taxes and possibly resell the equipment to have a return of at least 20 percent of its original value. In contrast, public entities may stretch the depreciation over a longer term.
In several cases, straight-line depreciation can apply. Suppose you buy a skid-steer loader for $30,000 and you intend to keep it for 15 years. The straight line depreciation rate is developed by dividing the machine’s 15 year life into the total cost, which comes to $2,000 a year.
In general, Mavrick says earthmoving equipment depreciates over a five-year period, declining in value between 12 and 20 percent a year, if it’s used a considerable amount.
Whatever the case, the depreciation method you and your accountant select will determine your tax return deductions.
Key point: If you have the money, ownership is immediate. The equipment shows up as an asset on the balance sheet, and equipment cost is subject to the depreciation methods chosen by the customer, Zupancic says.
Flexible, economical rental
Rental offers flexibility and can often be more economical. Ransom sums it up by saying, “Rental is kind to the balance sheet, as equipment is not recorded as a liability. This results in a more favorable assets-to-liabilities ratio, which can impact your borrowing power. All these things, as well as intangibles such as safety, compliance and the cost to keep current with new equipment technologies, should be taken into consideration when evaluating whether the rental option makes sense.”
The message: If you want something different, or have unique needs, just ask a rental store and they will most likely customize a program for you.