If you're a construction business owner, one of your primary roles is determining whether to rent or lease the necessary equipment. The answer may be straightforward for some projects, whereas others may be less so. Suppose you wish to rent or lease large equipment like excavators or smaller equipment such as generators. In that case, you will need to consider numerous factors like operating strategy, cost, storage requirements and your available funds.
Learn how to find the equipment you need and whether renting or leasing is better for your company.
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The difference between renting heavy equipment and leasing is that you sign a contract for a shorter time frame and are not responsible for maintenance fees when you rent. After your rental period expires, you must return the equipment. With a leasing agreement, you sign a contract for an extended time, and you may have the option to purchase your equipment at the end of your lease.
Choosing whether to lease or rent your equipment is an important decision that requires some thought and research into your company, its finances and your project needs. Before you decide, consider the following aspects of your operation:
An equipment lease is a loan agreement that offers similar benefits to ownership in which a lender owns the equipment and leases it to a contractor at a monthly rate for a specific term. At the end of the contract term, you may be able to purchase the equipment, return it or start a new lease. Similarly to car drivers, many contractors prefer to lease their equipment to have the latest models and reduce maintenance costs.
By leasing your equipment, you can avoid large down payments and use this money for other aspects of your operation. When you lease, you typically make payments with operating funds and count your lease payment as an operating expense. However, if a lease includes specific options, such as a bargain lease, it may qualify as a capital lease and fall under different tax regulations.
Some additional considerations of leasing equipment include:
Another aspect to consider when leasing is the contract hours. If you build in more contract hours than you use, you will overpay, as you will not receive a refund for unused hours. You may also face a penalty for exceeding your contracted hours, similar to going over a specified mileage amount on a leased car.
Equipment owners take a risk when leasing their property, which is why many draft a comprehensive lease agreement before allowing contractors to use their equipment. While every lease will likely look a little different, some essential aspects of an equipment lease include the following:
When calculating an equipment lease, it helps to understand how much a business equipment lease will cost your company each month. A lender will typically consider the following factors:
There are also multiple lease options, and the type you choose can affect bookkeeping and accounting. The two types of leases are:
While an operating lease does not provide any ownership benefits, you can return your equipment or purchase it at a market value at the end of your lease term. An operating lease is generally shorter than the equipment's economic life, and most last between one and three years. During this time, your equipment will not be a liability or an asset but a rental expense, and you may be eligible for specific tax advantages.
Capital leases are generally similar to operating leases. However, with a capital lease, you mark your equipment as an asset on your business balance sheets. You can still purchase your equipment when you complete the leasing period. A capital lease can be beneficial for tax reasons as you can claim a depreciation tax credit and an interest expense on the lease.
An equipment rental is similar to a lease in that a contractor rents equipment for a set time. Renting generally offers more flexibility than leasing and allows you to rent equipment for a shorter time. Renting is often a beneficial option for smaller companies that lack the resources to maintain a larger fleet.
An equipment rental means no down payment and often less money spent on the overall arrangement than leasing. Rental payments are also tax-deductible expenses, which can simplify accounting. By renting your equipment, your company is free from any maintenance and repair responsibility. Additionally, since many rental companies regularly update their inventory, you can access new or newer assets.
However, you'll still need to consider several factors when renting. You are often at the mercy of the rental inventory when looking for equipment and may not find what you need. Renting can also increase your overall expenses due to higher payment term costs. Some additional factors to consider include the following:
While equipment rental agreements are somewhat flexible, some elements are present in every contract. Some details you can expect to find in your rental agreement include the following:
Determining your rental rate upfront enables you to manage your budget better and understand how much your rental equipment will cost daily, monthly or yearly. The overall rental cost will multiply your rental rate per year, month or day by the rental period. Depending on your specific equipment, you may also wish to factor in any pickup and delivery charges and insurance costs.
Some additional factors which may impact your rental rate include:
The type of equipment you need can significantly affect your overall rate. For example, smaller equipment, such as a compact truck loader, will likely be at a different rental rate than a large backhoe loader. Other specialty heavy equipment, such as forestry machines or dump trucks, may only be available for short-term rentals.
Equipment that is too small can require your operators to work longer and harder, increasing production costs. Conversely, equipment that is too large can also be inefficient and harder to operate. Large equipment also uses more fuel, which can increase overhead costs. When you work with The Cat® Rental Store team, dealers help you select equipment that is the right size for your job for maximum efficiency.
The age of your equipment rentals can also impact your rental rate. Older equipment may lack crucial technology, which can affect your bottom line. However, older equipment may cost less to rent than newer models. When looking at newer equipment, you may wish to consider the fuel economy and operator efficiency, which may offset the higher rental rate.
How long you need your rental equipment can also impact your overall rate. Some of your contract length options include:
Your rental rate may also vary on location as some markets have higher rates, business taxes or wages than others. These economic factors can drive up business costs, resulting in higher rentals.
Equipment availability can also drive up rental costs. Some rental providers may only have a limited supply of equipment to rent at any time, leading to higher rental rates. Some smaller rental businesses may also charge a premium for specialty equipment, especially during peak demand season.
While cost is a significant factor in determining if it is more beneficial to lease or rent, you should also consider your operational strategy. Some questions to consider are:
When you rent through The Cat Rental Store, our team will discuss these questions with you in depth to help you make the best choice for your project needs.
Renting your construction equipment is an excellent way to ensure your team completes projects on time while saving you money. When you rent from The Cat Rental Store, you will gain access to high-quality machines to complete any job. By renting, your company will keep costs low and gain access to the equipment you need for a high return on investment.
Visit a Cat rental dealer near you today to learn more about renting heavy equipment. Our rental specialists will work with you to choose the right equipment and provide a quote for short- or long-term rentals. Find a dealer near you, browse our rentals online or give us a call at 1-800-RENT-CAT to find the right equipment for all your construction needs.Find The Cat Rental Store Near You