Leasing Equipment vs. Renting Equipment

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.

Jump to a section:

• Is Renting Equipment the Same as Leasing?
• Benefits and Considerations of Leasing
• What to Expect in an Equipment Lease
• Benefits and Considerations of Renting
  
• What to Expect in an Equipment Rental Agreement

Is Renting Equipment the Same as Leasing?

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.

Initial Considerations

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:

• Your company's current finances: Before renting or leasing, review your company costs to create a budget. Once you have a budget, it will guide you on what equipment you can afford and if it is more cost-effective to rent or lease.
• The total cost of renting or leasing: Calculating equipment cost is more complex than just looking at the rental rate or leasing amount. Assessing your total cost is essential to calculate your overhead accurately. When calculating the cost of renting equipment, consider delivery fees and taxes. To determine an accurate leasing rate, include additional maintenance fees. Regardless of your choice, account for fuel and storage when determining the total cost of equipment.
• The length and frequency of your project: How long you expect to work on a project is also an essential consideration as you decide whether to lease or rent. By creating a timetable and sticking to it, you can choose a cost-effective option to suit your needs.

Benefits and Considerations of Leasing

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:

• Higher interest rate compared to a bank loan to purchase your equipment outright
• Fixed obligation period
• Longer commitment period
• Building equity may be more of a challenge

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.

What to Expect in an Equipment Lease

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:

• The duration of your lease: This is the amount of time the lessee will have to access the leased equipment.
• Market value: The equipment's market value determines how much insurance you need and the cost of replacing the equipment due to theft or damage.
• Cost: Costs include terms such as the lease rate, how to make payments and a payment timeline. 
• Renewal options: A lease may also provide guidelines on renewing the lease if you wish to keep it longer than the lease term.
• Cancellation provisions: A lease generally includes provisions to end the lease and penalties for early termination.
• Tax responsibility: This details the signed lease type and if a lessee must pay the equipment taxes.

How to Calculate an Equipment Lease

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:

• The current value of the equipment
• The residual value or the value your equipment will have at the lease's end
• Interest rate
• Lease length

There are also multiple lease options, and the type you choose can affect bookkeeping and accounting. The two types of leases are:

Operating Lease

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 Lease

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.

Benefits and Considerations of Renting

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:

• Your company is responsible for any damage incurred.
• Long-term rentals may incur higher costs.
• You may not be able to access specialized equipment.
• Rental companies can swap out a machine if it sells, which can cause delays or require you to retrain operators.

What to Expect in an Equipment Rental Agreement

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:

• Equipment: An equipment contract should clearly define the nature of the rental equipment. If the equipment has additional attachments, the rental agreement should also list and detail these attachments.
• Term length: All rental agreements should clearly state the length of the rental. Most equipment leases require lenders and contractors to establish a term agreement before moving forward with the rental.
• Warranties: If the lender requires additional warranties, they will list them in your leasing contract.
• Maintenance: The rental agreement will verify who is responsible for maintenance and what repairs you can expect.
• Transport and installation: The contract will specify who is responsible for transporting and installing the equipment for usage.
• Insurance: Most contracts verify which party is responsible for insuring the equipment.
• Usage limitations: Setting up usage limitations ensures contractors do not abuse the good faith use of rental equipment.
• Termination: The contract will include the conditions under which either party can terminate the agreement, whether termination can be voluntary and if you must give advance notice.
• Payment: The contract should clearly state the cost of renting the equipment, the payment amount, due dates and acceptable payment methods. 

How to Calculate a Rental Rate

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:

Equipment Type

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 Size

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.

Equipment Technology

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.

Contract Length

How long you need your rental equipment can also impact your overall rate. Some of your contract length options include:

• Hourly rental agreements: Many providers require you to rent equipment for a minimum number of hours before authorizing a rental contract. The exact time can range from two to six hours and will vary depending on the specific policy.
• Daily rental agreements: Daily rentals are popular among small business owners who need to complete projects over a few days. Using a daily rental allows for greater flexibility, and contractors can get the exact equipment they need without extended contract terms. 
• Weekly rental agreements: Contractors can also rent equipment weekly, which serves as a beneficial middle ground between daily rentals, which may be too short, and monthly rentals, which may be too long.
• Monthly rental agreements: Renting equipment by the month provides longer-term options for extensive projects such as home building or construction. Roadwork and other seasonal jobs may also benefit from a monthly rental agreement.

Location

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.

Specialty Equipment

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.

Which Option Is Right for You?

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:

• What level of responsibility do you want for your equipment?
• Do you need a piece of specialized equipment?
• How long do you need the equipment?

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.

Rent Equipment From The Cat® Rental Store Today

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.