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Loan or Lease: Which One is Best for your Next Construction Equipment Investment?

Contractors working on small and large projects come down to an important question when it comes to acquiring construction equipment. Should they lease the equipment or take out a loan? 

The question isn’t simple to answer since there are many benefits to both options. An option that works for one contractor may not work for the other based on several factors, such as available budgets and current tax situations.

For some companies, they opt for both possible solutions depending on the type of work they specialize in, the location of the construction project, and the specific equipment that is needed. Let’s find out more about these two options and provide tips on which to select when investing in construction equipment.

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Leasing Construction Equipment

Construction equipment leasing provides contractors the option to rent anytime at nearly any location. The rental equipment market has expanded exponentially due to the increase of infrastructure and industrial construction projects on a global scale. This reach provides more options on where you may lease the equipment as you can compare prices and equipment features between rental companies.

When it comes to leasing, a contractor obtains a piece of heavy equipment based on a rental plan that could consist of monthly or yearly terms. Many rental equipment companies drop off the equipment at the specified construction site and will pick it up later after the contractor no longer requires it. 

The rental company also provides all maintenance and repairs. You only pay for use of the equipment. If you desire to own the piece of equipment, the rental company may offer end-of-term payoff agreements for you to buy the equipment outright.

Reasons to lease the equipment may involve the size of your company and the available working capital. If you run a small business and want to increase cash flow to other projects, then leasing may offer the most viable option as it lowers your heavy equipment investment costs. Another likely reason to lease equipment may depend on the type of work you specialize in.

You may have a project task that is not something normally provided by your company that requires a special piece of equipment. Since you are only going to use the heavy equipment for this one job, leasing it allows you to finish the task without making a large initial purchase. This setup helps you avoid maintaining and storing a piece of heavy equipment that won’t be in service again.

Also, a contractor may like the flexibility in using newer models of equipment with the latest functions and technologies. Some rental companies purchase newer fleets every couple of years while selling off their older equipment. You may rent a newer piece of heavy equipment whenever you like and decide later whether to purchase it.

Getting Equipment on Loan

Obtaining a loan for construction equipment allows contractors to expand their fleets to offer additional services on projects. You own the equipment outright while paying it over a set period based on the contract terms. The down payment for the loan is flexible. You may offer a trade-in, rental equity, or cash. During the loan period, you take on full financial ownership of the equipment. So all maintenance and repairs needed for the equipment fall onto your company.

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Reasons to get a loan on equipment generally focus on generated equity. Future profitability may favor the company that owns the equipment and places it into immediate use. The equity in the equipment will go up every year based on market outcomes, and you may also obtain several tax breaks on depreciation, interest, and insurance when owning the equipment. Other reasons to get the equipment on loan may involve the following:

  • Branding: You may position your company as a full-service contractor who owns their own equipment to clients. Clients feel more comfortable about contractors owning the equipment since it also means the company invested in full training of operators to run the machine.
  • Take on Projects Anywhere: While equipment rental companies are expanding into other regions, they still have service area limits. By owning equipment through a lease, you know that you can have the equipment at any required location.
  • Payment Stability: Loan payments are set up for a specific amount spread out over the course of the contract. If you leased the equipment previously, the lease amounts may be taken into account for the loan repayment plan if purchasing through the same dealer. For equipment that is used daily, a loan will save money in the long run as payments are typically lower than lease payments.

Evaluate Your Equipment Risks and Finances

When deciding on getting a lease or a loan for construction equipment, it all comes down to how much risk you are willing to take on. In some instances, the risk of owning the equipment simply isn’t feasible for one-off projects or for smaller companies that don’t have the trained operators or storage budgets. 

On the other hand, tax benefits and equity when getting equipment on loan may be advisable versus paying the high costs of constantly leasing equipment. In most circumstances, you’ll lease some equipment and have loans on other equipment based on the project and your finances.

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