Construction Equipment Guide: Leasing vs. Financing
When deciding whether to lease or finance construction equipment, the right choice depends on the size of your business, the piece of equipment, and how long you plan to use it. The pros and cons of each will vary drastically depending on these two factors.
Below I will delve into the specific pros and cons of both options.
Construction Equipment Leasing Pros
Lower impact on cash flow – Construction equipment leasing gives you lower payments. When it comes time to buy equipment potentially, the dollars are also cheaper and inflated.
Flexible – Lease term and structure can often be negotiated. Sometimes they will even offer benefits such as seasonal payments where you don’t have to make any payments during the winter time.
Leasing provides 100 percent tax write-off – Equipment leasing payments are treated as a business expense, so they allow for complete tax write-off.
Leases are not assets – Because leases are not considered assets, they aren’t included on the balance sheet. This can lead to improved financial ratios.
No obligation to buy – At the end of your lease term, there is no obligation to buy the equipment. You can pay to use the equipment and then release all responsibility to the owner at the end.
Conserved cash – Less cash is needed up front which will make your balance sheet look good. When you lease, you don’t have to worry about breaking the bank!
Better credit lines – Equipment leasing provides you with additional credit availability. This can be helpful if you are tight on credit!
Construction Equipment Leasing Cons
Higher costs – Over time you will likely end up paying more than if you had bought the equipment.
No equity – You don’t own the equipment which means that when you finish using the equipment, you have no opportunity to make any money back.
Maintenance issues – Depending on your leasing company, you may have potential problems when it comes to getting things fixed. I certain situations, your leasing company might fight with you about who should pay for what repairs.
Availability – Depending on the equipment you need, there may be a limited number of brands and models. This may lead you to settle for something different than what you want.
Construction Equipment Financing Pros
More security – If you own equipment you don’t have to worry about any unexpected payments at the end of your lease.
Flexibility – Loans offer early buyouts and fewer penalties compared to leases which usually can’t be canceled.
Cheaper interest expense – If you are a larger company with good cash flow, financing interest expenses can be cheaper than leasing.
Equipment value – Construction equipment financing does risk your equipment depreciating, but it also offers major benefits if your equipment sustains its value!
Expense soft costs – Taxes, installation, and shipping charges can be expensed on profit and loss statement which avoids interest carrying cost!
Construction Equipment Financing Cons
Higher initial cost – Depending on the state of your company, it may be difficult to pay for equipment upfront. This is an extremely high cost for most companies.
Outdated – If it is a piece of equipment that uses technology, it can become outdated quickly.
Maintenance costs – If you own the equipment, you’re responsible for all maintenance and repair costs. If your piece of equipment breaks down a lot, this can be very expensive.
As seen above, the three main areas to consider when deciding whether to lease or finance are cash flow, balances sheets, and taxes. Depending on your specific business, some pros and cons might outweigh others. In the end, it’s up to you to decide what’s the right decision for your business.