Given the current economic conditions, it may be advantageous for grading and excavation contractors to lease or rent equipment.
The strength of the construction market over the last several years has made it “very advantageous” to lease or rent equipment, notes Heath Watton, vice president of Southeastern Equipment Company.
The uptick and consistency in the workload allows contractors to introduce diversity into their fleets through renting without getting into a long-term commitment, he adds.
“With leasing, people are seeing workloads out 18 to 24 months and can afford to invest in that lease because they have that commitment to use that equipment for that amount of time,” says Watton. “Renting and leasing is a huge asset to any contractor for that reason alone.”
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In general, rentals and leasing have been on the rise for several years as contractors evaluate their financial circumstances and degree of long-term investment with which they are comfortable on their balance sheets, says Agako Nouch, vice president of sales, Volvo Construction Equipment.
“In certain cases, contractors may not be in a financial position to fully utilize all the depreciation benefits due to alternative minimum tax rules, or they simply don’t have enough income to fully utilize the depreciation write-off,” he says.
“They can effectively trade the depreciation for a tax-advantaged lease that allows them to expense the lease payments, improve cash flow, and obtain off-balance sheet treatment to improve leverage ratio and financial ratios.”
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Every contractor has a core fleet with equipment they run every day “when you can grow your inventory while it pays for itself,” points out Watton. “You can take it to that job, do that job, and take it back home. If you have that long project and you can see out 18 to 24 months, the lease gives you the same flexibility. The work loads are allowing the contractors to grow inventories without that long-term commitment, and that’s so beneficial.”
There is a wide variety of equipment from which to choose for lease or rent.
“There are so many pieces that come out every year,” says Watton. “Everything is reinvented. Heavy dirt contractors are going to know what projects they’re going into what they have to use. They know the scope of their business. To determine their workload, they have to draw on their own experiences.”
While sales using financing is still the predominant means of equipment acquisition, the transaction also may start off first with a rental, such as a rental purchase option, notes Nouch.
“There are also situations in which additional equipment is needed to supplement a contractor’s owned equipment for a project,” he adds. “In these circumstances, leasing or renting equipment can be an advantageous alternative for the contractor to satisfy that shorter-term requirement without adding to the base level of equipment owned.”
Additionally, there are circumstances in which a contractor may have a unique incremental project for a set length of time and matching the bulk of the specific equipment needs with either renting or leasing for the same period can be beneficial, Nouch points out.
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In general, almost all equipment lends itself to owning, renting, or leasing, says Nouch.
“However, the more specialized the equipment or capital in nature, the less the equipment is apt to be available for rent or lease at reasonable rates,” he adds. “Of course, there are always financial solutions to achieve the desired outcome depending on the contractor’s priorities.”
Smaller contractors still tend to buy, and the very large contractors typically have sufficient funding to manage their own financing or balance sheet, says Nouch.
“However, with a special project for a limited length of time, a contractor of any size may deploy more rental and leasing with focus on larger equipment needs,” he adds.
Whether today’s economy makes it easier or more difficult for leasing depends on several factors, notes Watton.
“For a true leasing, it can be a difficult environment because typically, to lease, the leasing companies want to see the experience,” says Watton. “There are manufacturers that have captive financial institutions backing them. We kid that they’ll lease them in a heartbeat.
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“However, most leasing companies want to see somebody who has three to five years of business experience. They don’t want to get into a contract with someone where it’s their first time. The ones with the captive finance, sure, they will. But the majority of them want to see the experience of the contractor.”
That may entail seeing the contracts that are in place or the details of an upcoming workload, he adds.
“It’s very important for a business owner to be able to sell his company to have a nice portfolio if they are going to entertain a lease so they can provide that information for whomever they’re doing business with to give it to the leasing company, or, if they’re going to get their own leasing company, have that information put together for them because it is vital to the growth of their business,” says Watton.
Most OEMs provide a leasing mechanism through either a captive finance company or through a branded third-party finance company, Nouch points out.
“There also are a number of independent lenders that provide leasing solutions on their own,” he says. “Leasing typically entails that a higher risk obligation is in place for the leasing company and perhaps the OEM and dealers at the end of lease term.”
Nouch points out that in a growing market with an increase in prices, this is not an issue; but in a prolonged market decline in which both new and used equipment pricing may decline, the risk and credit appetite for leasing may be more stringent.
“Today, there does not appear to be significant impediments, especially to longer-term leasing of three years or more,” he says.
Considering the size and type of a job, Watton says many leasing companies will entertain a lease for as little as 12 months, but typically it’s 18 to 24 months.
“A contractor may be doing work on a project with 12 to 24 months’ worth of work. It enables them to make that commitment,” he says. “I think it’s very important for a contractor to really know that scope. They’ve got this work lined up for this amount of time before they will commit to that lease because they’re required to make that payment.”
While renting may entail paying a higher rate than leasing, it is more flexible, says Watton.
“Renting gives that flexibility that you’ve got a project that you successfully bid and you need two or three pieces of equipment,” says Watton. “It’s going to be a write-off to make that rental. Contractors figure the price with renting extra pieces. It gives them the flexibility to grow that inventory with those products they need to finish and then send them home.”
Another benefit: contractors don’t have the maintenance and other tasks that come with owning equipment.
“If it’s a short term to grow inventory, rent,” says Watton. “In the long term, I would look at that lease.”
Bob Harrell concurs. He runs Specialty Rentals & Attachments in the greater Philadelphia area and rents excavators with all types of attachments to contractors needing them from Maine to Florida.
He rents to a lot of contractors who may have a week-long job and don’t want to spend the time modifying their machines for an attachment when they can rent the machine and send it back to his company when they are done.
Harrell’s company will go to a job site and make recommendations for the most productive and efficient piece of equipment, and will custom-build equipment as needed. If there are any problems, they are on the job site mitigating them, freeing up the contractor to move forward with the tasks at hand.
Steve Brown, global rental marketing and operations manager for Caterpillar, notes the “primary benefit of leasing or renting is the shift of ownership risk and reduction of capital spend for the contractor. In addition, maintenance costs, regulatory compliance, and guarantee of uptime is shifted to the rental company or dealer.”
With the ability to supplement production peaks, reduce storage costs, and utilize the latest technology, rental and lease options are attractive for all machines, notes Brown, adding that the rental industry offers solutions for both production and job-based environments.
Leasing continues to be an attractive option through the economic cycles, says Brown. “Contractors can mitigate the risk of ownership in downturns and preserve capital during peaks in upturns,” he adds.