Construction Equipment: Lease or Buy?

Rob O’Regan -- Expert Business Source, 3/26/2007 7:05:00 AM

As your construction business matures, it may be time to replace some of your job-site equipment – or add more to the mix. Which means it’s time to revisit the ages-old financing question: Lease or buy?

The options now, however, are more plentiful than in the past – and potentially more confusing. Things to consider:

Cash flow. Obviously, cash flow remains the biggest driver in the lease-or-buy decision. “A lot of running a small business is making sure you have enough working capital each month,” says Joel Rutledge, president of the Equipment Finance unit at BB&T Corp., a financial holding company headquartered in Winston-Salem, N.C. “With a lease, an owner can better shape what that capital outflow looks like.”

Leases typically require smaller down payments than loans. However, service providers such as BB&T sometimes offer 100 percent financing on equipment purchases. “We view the asset as collateral,” says Rutledge.

Tax implications. A contractor often can deduct the full amount of lease payments on tax returns. Purchasing the equipment, on the other hand, will allow the owner to depreciate the equipment on their books. Rutledge counsels clients to go with whichever option provides a better tax position.

Equipment obsolescence. If it’s important for your business to keep up with the most modern equipment, a lease will provide the flexibility of upgrading every three years (or whatever the term of the lease).

Lessor options. Make sure you get quotes from multiple service providers and ask them to walk you through all of your options. BB&T, for example, offers six different types of leases, including lease-to-own agreements and skip leases (which allow you to skip a payment during slow periods without penalty). BuyerZone.com breaks leases down into two main types:

• Finance leases: Also known as capital leases, conditional sales or dollar buyout leases, these leases work best if you intend to keep the equipment at the end of the lease, according to BuyerZone. The main advantage of this type of lease is that it gives you the option to purchase the equipment for a nominal fee, usually $1. Payment terms on finance leases tend to last close to the expected useful life of the equipment.
• True leases: True leases, also called tax leases, operating leases or FMV (fair market value) leases, do not usually span the full expected life of the equipment. At the end of the lease, you can walk away from the equipment or purchase it at fair market value. Payments on true leases generally tend to be lower than those on finance leases, because lessors can resell the equipment when the lease ends.

BuyerZone.com also offers a rundown on the types of providers you can turn to for leasing services:

• Captive leasing company: Manufacturers of construction equipment often offer leasing through subsidiary leasing companies.
• Broker: Equipment leasing brokers take your lease requests to the banks and financial services companies most likely to agree to finance your construction equipment.
• Independent lessor: Banks, equipment lease specialists and more diversified financial companies lease directly to businesses.

Rob O’Regan is a freelance writer based in Londonderry, N.H.