Leasing or Financing: What is the Right Option for Construction Equipment?

From backhoes to bulldozers, construction firms need to have equipment that is reliable, up to date, and able to perform the jobs you need. However, these types of heavy machinery are extremely expensive to buy and can tie-up significant levels of capital. As a result of this, more and more companies now lease construction equipment as a means to get the machinery they need at a reasonable price.

Just about any piece of equipment, machine, or tool can be financed or leased in the construction industry and deciding whether this is the right approach to take is an important decision you will have to make. Each has clear pros and cons, and whether you lease or finance your construction equipment will depend on an array of factors. In this post, we will take a look at leasing and financing so you can determine the right one for you.

Construction Equipment Leasing

When leasing construction equipment it means you have full access to use and operate the machinery without ownership of it. As the equipment still belongs to the leasing company, they are responsible for maintenance and handling repairs, but it is still reliant on you keeping the machinery in good condition. Following the completion of the lease, you will have options regarding whether to lease the machine again, purchase it outright, or return the equipment and acquire an upgraded model.

Advantages of Construction Equipment Leasing

When it comes to leasing your construction equipment, there are many advantages that it has over just buying upfront. These include:

• The opportunity to lease the most up-to-date equipment. This is especially useful in industries where machines are upgraded regularly
• Many leasing companies will give you the opportunity to lease in order to own. With structured payments over a period of time, once the cost of the machine has been covered, ownership will pass to you
• No large upfront payments. This lets you structure your financial situation efficiently, allowing you to allocate funds effectively to help with growth
• Leasing is often tax-deductible and has many tax-related benefits that can help you financially
• Leasing will not count against your credit
• The leasing company maintains the vehicle, therefore all maintenance and repairs are their responsibility

Disadvantages of Construction Equipment Leasing

While there are many advantages to construction equipment leasing, there are several negative factors you will have to consider too:

• Over time, the overall price you pay may be higher compared to buying and you may also need to pay interest as well
• You do not own the equipment or machinery, so it does not give you any equity
• Leases occur over a long-term period meaning you may have to keep the equipment longer than you need it for
• There may be a balloon payment at the completion of the lease
• You are dependent on the lease company's schedule for repairs and replacements

Financing Construction Equipment

Equipment financing is essentially a loan. Usually used to purchase business-related equipment, these loans involve periodic payments paid over a fixed term. Once paid in full, you will have full ownership over the equipment you have been using. An equipment loan may also impose a lien upon additional business assets or require a personal guarantee before receiving the equipment.

Advantages of Financing

Regarding equipment finance, there are some slightly different advantages when compared to leasing. These include:

• With construction equipment finance there is an added level of security as you will not have to worry about any unexpected costs that need paying following the completion of your lease
• There is greater flexibility when it comes to financing with early buyout options and fewer penalties
• If you are a larger company with good cash flow, financing interest expenses can be cheaper than leasing equipment
• While construction equipment finance can involve the risk of depreciating, if your equipment sustains value it can be a benefit to your company
• When financing you can usually expense soft costs such as taxes, installation, and shipping charges to avoid any interest carrying costs

Disadvantages of Financing

However, equipment financing does have its own disadvantages, namely:

• If you were looking to finance heavy equipment, it is important to know that it comes with a higher initial cost, and depending on the cash flow of your company, it can be difficult to pay for equipment upfront due to the high price of construction equipment
• If it is a piece of equipment that uses specific software or technology, they can become outdated very quickly, meaning you will need to upgrade regularly
• As you would own the equipment, you would be responsible for all maintenance and repair costs, which can be very expensive

Final Thoughts

When wanting to finance heavy equipment, there are many factors to consider. Understanding the key differences associated with each is crucial to ensuring you receive the best deal. While it can all seem confusing, talking to industry specialists like Meridian Leasing can help to allay any fears and answer any questions you may have regarding this complex aspect of the industry.

My role as the Vice President of Healthcare at Meridian Leasing is to partner with our top healthcare clients to build a medical equipment strategy to meet the organization financial needs.