You started your construction company with big dreams. Now you’ve landed some major projects and need to scale up your equipment fleet fast. But those bulldozers, excavators, and cranes don’t come cheap. So what’s the best move – buy or lease?
Leasing construction equipment is often the smarter financial decision for contractors. Not only does leasing give you access to the latest models and advanced technologies, it also helps you manage cash flow on projects while avoiding massive capital expenditures.
In this comprehensive guide, we’ll walk through all the ins and outs of construction equipment leasing so you can make the right choice for your business. You’ll learn:
- The benefits of leasing versus buying heavy equipment
- How financing and lease options work
- Factors to consider before signing a lease
- Steps for finding the best lease deal
- The future of the construction equipment leasing industry
So rev up those engines and let’s get started!
An Overview of Construction Equipment Leasing
Before weighing the pros and cons of leasing, it’s helpful to understand exactly what equipment leasing means in the construction industry.
Construction equipment leasing involves a leasing company or equipment dealer essentially “renting” machinery like excavators, backhoes, bulldozers, cranes, and loaders to a contractor for a predetermined amount of time. Instead of paying the full price for the equipment upfront, you make monthly lease payments over the term of the lease, typically lasting 12 to 48 months on average.
The two main parties in a lease agreement are:
- Lessor: The equipment financing company that acquires the equipment and then leases it out. Lessors retain ownership during the lease.
- Lessee: The contracting company that selects equipment, signs the lease, makes the payments, and has use of the machinery during the lease.
At the end of the lease period, lessees typically have the option of either returning the equipment or purchasing it at a discounted price from the lessor.
Now let’s look at why leasing heavy equipment could be your smartest move.
Key Benefits of Leasing Over Buying
Leasing offers several compelling advantages over purchasing equipment outright:
Preserve Capital and Cash Flow
Equipment leasing preserves capital for other business needs. With buying, you pay the full sticker price upfront. Leasing only requires monthly lease payments, saving you a massive capital outlay.
Preserving capital also helps smooth out cash flow. Equipment lease payments are predictable expenses that can be accurately budgeted for each project.
Access the Latest Equipment
With a lease, you can regularly update equipment to leverage the latest technologies and models – a crucial competitive advantage. With buying, you’re stuck using equipment until it’s fully depreciated.
Adapt to Project Demands
Leasing provides flexibility to scale your fleet up and down based on project workload. No need to store excess equipment between jobs. Just turn it in at lease end and get different equipment for the next project.
Potential Tax Advantages
Leasing may provide tax benefits over buying. With a capital lease, 100% of payments can be deducted as business expenses. Capital improvements must be depreciated over time.
Lower Monthly Payments
Monthly lease payments are generally lower than monthly financing installments for purchased equipment. This helps ease cash flow requirements.
Known Maintenance History
With a lease, you know the full maintenance history of the equipment. Buying used equipment comes with uncertainties about issues.
Some leases let you upgrade equipment during the term. This allows you to swap out for newer models with updated features.
Clearly, leasing has distinct financial and operational advantages for many contractors. Next let’s examine the various lease financing options available.
Financing Options For Equipment Leases
For contractors lacking the capital to self-finance an equipment lease, external financing is available. Here are main options for funding leases:
Banks offer financing for equipment leases. Monthly payments are made to the bank. At lease end, the equipment’s ownership transfers from the bank to the contractor if they purchase it.
Pros: Potentially lower monthly payments than vendor leasing. May offer flexible terms and bundling.
Cons: More complex process than vendor leasing. Generally requires good credit and financial history.
Equipment manufacturers and dealers often offer customized financing programs for leases. Streamlined process since the vendor handles everything.
Pros: Simple and fast process. May receive discounts from bundling equipment purchases.
Cons: Interest rates may be higher than banks. Limited flexibility or options.
In a leveraged lease, the lessee puts up 20-40% down and borrows the rest from a lender. The equipment acts as collateral.
Pros: Potentially lower monthly payments. Lessee builds equity. Tax advantages.
Cons: Higher down payment requirement. Risk of equipment repossession if default.
Selling existing equipment to a financing company, then leasing it back. Generates capital for the contractor.
Pros: Immediate access to cash. Lock in higher residual value. Tax benefits.
Cons: Higher monthly payments. Lose ownership equity in equipment.
Carefully weigh the pros and cons to find the best financing fit for your business. Now let’s look at other vital factors when signing an equipment lease.
Key Considerations Before Signing a Lease
While leasing equipment comes with many benefits, you also need to enter into any lease agreement carefully:
Clearly Understand the Terms
Carefully read lease terms and conditions and get clarification on anything unclear before signing. Know late fees, default clauses, etc.
Define the Optimal Lease Period
Choose a lease term that aligns with projected equipment needs. Avoid paying for unneeded equipment between jobs.
Consider Tax Implications
Understand how leasing equipment instead of buying may impact your taxes. Consult an accountant to maximize benefits.
Decide End-of-Lease Options
At lease end, know whether you’ll return or buy the equipment. This affects monthly payment amounts.
Account for Maintenance
Determine if maintenance costs are included or if you must cover repairs. This also impacts monthly payments.
Examine Insurance Requirements
Review lease insurance requirements. You may need to purchase separate policies. Factor in costs.
With a clear picture of lease considerations, now let’s go through the typical equipment leasing process.
Steps of the Equipment Leasing Process
Follow this standard sequence to make leasing equipment a smooth, positive experience:
1. Identify Equipment Needs
Determine what equipment you need and desired lease term based on upcoming projects and growth plans. Obtain buy vs. lease cost analyses from dealers.
2. Get Lease Quotes
Solicit lease quotes from multiple equipment vendors and financing sources. Compare rates, maintenance options, bundle deals.
3. Secure Financing
If needed, apply for lease financing from banks, vendors, etc. and obtain approval. Have your financial statements ready.
4. Review Options & Choose Lease
Analyze all lease quotes and choose the optimal deal based on your business goals and situation.
5. Sign Lease Agreement
Review lease terms with a lawyer. Negotiate any necessary changes before signing an agreement.
6. Take Delivery & Inspect Equipment
When equipment is delivered, thoroughly inspect it against lease documentation. Report any issues immediately.
7. Make Lease Payments
Make timely monthly lease payments. Seek approval before missing or altering payment dates.
8. Return or Purchase Equipment
At lease end, return equipment or exercise purchase option according to lease terms.
Next let’s look at tips for finding the best possible lease deal for your construction company.
Finding the Best Equipment Lease Deal
Follow these tips to get optimal value from an equipment lease:
- Compare multiple vendors – Don’t go with the first lease offer. Shop around for the best rates and terms.
- Negotiate for the best deal – Negotiate rates, maintenance fees, buyout terms, etc. to maximize savings.
- Seek outside financing – Explore bank/credit union financing which may offer lower rates than vendor leasing.
- Leverage bundling discounts – Bundle leasing multiple equipment pieces from the same supplier to get a discount.
- Prioritize favorable maintenance terms -Seek leases where routine maintenance is included or discounted.
- Time lease periods for tax advantage – Start leases before end of year for maximum tax deductions.
- Use available incentives – Take advantage of limited time lease promotions offered by vendors or banks.
With the right lease structure and deal, equipment leasing bends the cost curve in your favor compared to purchasing equipment.
The Future of Construction Equipment Leasing
The equipment leasing industry as a whole is projected for steady growth in coming years. Here are two trends to expect:
- Increased adoption of technology – Telematics and fleet tracking will help lessors better manage equipment remotely and optimize leasing.
- Rise of equipment rental-purchase – More dealers will offer leases with 100% of payments going towards a future equipment purchase.
Smart contractors will leverage these trends to maximize their access to advanced equipment through innovative leasing arrangements.
Start Growing Your Fleet the Smart Way
We’ve just covered everything you need to know to make strategic equipment leasing decisions for your construction company. Leasing provides flexibility and cash flow advantages that equipment purchases simply can’t match. Now you’re equipped with in-depth knowledge of the benefits, options, considerations, and processes around leasing.
The next step is to put this info into action as you scale up. With the right lease financing and terms, you can gain access to a modern fleet that propels your construction business success into the future. Just remember the key lessons:
- Leasing preserves capital and cash flow compared to buying equipment
- Monthly payments are lower than traditional financing
- You can acquire advanced equipment and upgrade more easily
- Carefully negotiate lease terms for maximum advantage
Ready to grow? It’s time to start leveraging equipment leasing to steer your construction company ahead of the competition while optimizing your financial performance. Let the leasing begin!