Complete Guide to Heavy Equipment Leasing
Due to the high cost of heavy equipment, many construction firms choose to lease machines rather than buy them outright. Leasing requires little or no money down, which allows you to conserve working capital for operating expenses. The financing is generally easier to obtain than a bank loan. And when the lease is up, you can return the equipment or trade it in for a newer model.
Heavy equipment that is often leased includes forklifts, excavators, backhoes, bulldozers, conveyors, tractors, cranes, trucks and more. Equipment can be new or used, depending on your budget. Leases can be obtained for equipment of varying price ranges, from just a few thousand dollars to several million.
Some four out of every five businesses have leased equipment at one point or another, according to the Equipment Leasing and Finance Association. That figure speaks to the overall benefits of leasing over buying.
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How Equipment Leasing Works
Leasing is essentially like renting a piece of equipment for a set period of time. Just like leasing a car, you agree to a set amount of years, make monthly payments and then return the equipment or trade it for a new model when the lease ends. Many companies also offer buyout options - you can pay slightly more per month for a $1 or $100 buyout option at the end of lease term or less for a fair market value buyout option.
Lease terms can vary greatly, so it’s important to understand all the details before you sign a contract. Contracts typically span anywhere from 12 to 60 months, but they can be shorter or longer. The longer the term of the contract, the less you will pay per month. Some leases require money down, but most do not. Some include the cost of repairs and maintenance, while others don’t. Read the lease details carefully before signing so there are no surprises later on.
Pros and Cons of Heavy Equipment Leasing
- Little or no money down - Get the equipment you need without shelling out a large chunk of cash upfront. Leases also won’t tie up your business’ line of credit because they are different than bank loans.
- Tax savings - In most cases, equipment lease payments are tax deductible, which reduces the overall cost of the lease.
- Modern equipment - Leases allow you to obtain modern equipment that might otherwise be too expensive. And when your lease it up, you can trade the equipment in for something newer and better. With buying, you’re generally stuck with the equipment for many years due to the high cost.
- Higher long-term costs - Over the long-term, leasing is almost always more expensive than buying. However, many businesses are willing to accept this to preserve working capital and lines of credit.
- Commitment - When you sign on the dotted line, you’re committed to paying for that piece of machinery for the full length of the contract, whether you continue to need it or not. When you purchase a piece of equipment, there’s always the option to sell if it’s no longer useful.
- Risky for startups - For newer companies with less established credit, the business owner may be required to put personal credit on the line to obtain a lease. If the business goes under, so could your personal finances.
Cost of Equipment Leasing
Monthly lease rates vary widely depending on the type of equipment you choose and the length of the lease. To a lesser but still important degree, your company’s credit rating also plays a role. Not surprisingly, the better your company’s credit, the lower the monthly payment.
Generally, a $50,000 piece of equipment will cost you $4,000-$5,000 per month with a 12-month lease; $1,200-$2,200 with a 36-month lease; and $800-$1,500 per month with a 60-month lease.
Some leasing companies require a security deposit and downpayment, while others don’t. Some will allow 100 percent financing - including costs like tax, delivery and training - while others require those funds upfront.
Equipment Leasing Tips
- Ask for referrals. Talk to other business owners in your industry about which companies they’ve used, and whether they were satisfied. Or, you can ask the company selling the equipment for a referral. They’re likely going to refer you to a leasing company with competitive rates because they have a vested interest in making sure the equipment sells.
- Seek multiple quotes. Never opt for the first offer you get without finding out if you can get a better rate and/or terms elsewhere. Think about it like shopping for insurance - you wouldn’t blindly choose an insurance company without comparing rates and benefits.
- Research the company. Find out how long the leasing company or broker has been in business. Check the company’s track record with the Better Business Bureau and read online reviews, if they exist.
- Review lease terms carefully. We touched on this earlier, but it’s crucial. Know exactly what you’re signing before putting pen to paper. Don’t be afraid to negotiate for what you want. If you want the cost of repairs to be included, ask for it. The heavy equipment leasing industry is competitive, so many companies will make concessions to win your business.