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Buy, Borrow, Rent or Lease: 4 Tips to Minimize Risk

Sep 17, 2018 - one year ago

By Supply Post

With the notorious volatility of the construction industry looming more over owners’ and contractors’ heads, machinery contracts are becoming increasingly important. Whether a single crane is rented, leased, bought, or borrowed can make or a break a company in a matter of years.​

Particularly for small businesses, looking over contracts, future net profit, and utilization schedules for new gear has become a second language of construction. Mike Vorster of C.E.M.P. Central Inc. dissected this difficult task to its core principles during an education session at CONEXPO-CON/AGG 2017.

The main platform of consideration is not cost, Vorster claims, but risk. Adding to a fleet boils down to betting income against future profitability, a bet businesses make every day. But when acquiring new equipment, Vorster argues that there exist a unique set of parameters to consider that can effectively lower this risk.

By examining a business’s net cash flow after tax, its available technology, its future workload, and its overall technical skill, the path to ownership becomes crystal clear.

Understand ownership
Aside from buying, knowing who owns the equipment makes a big difference, particularly when claiming depreciation on taxes. For example, an excavator leased under an operational lease is still owned by the lease house and claimed on their taxes; for a capital lease, it’s owned and claimed by the lessee. This subtle differentiation can push a profitable acquisition into the red come tax season.

Weigh cash flow differences 
Most of acquiring new equipment is weighing a business’s ability to lose cash flow against the future profitability of a machine. Purchasing equipment offers pure profits once it pays itself off, but requires intense cash flow loss at the beginning. On the other hand, leasing requires much less of an initial commitment, but the fixed payments kill any opportunity for pure profit.

Examine future profitability
New equipment requires work; without it, losses accrue quickly. Business’s comparing buying to other methods must first look inward at their future profitability. Without several years of work to give a new machine, the risk increases beyond reasonable levels. Without busy days of full workloads for the machine, cash flow may not over take costs, fixed or otherwise.

Consider worker ability
Worker ability must factor into the decision. New equipment requires training expenses, because untrained operators lacking in handling confidence will work hesitantly, impacting profitability. It’s important also to consider if the technology is already present in the fleet; new gear may not even be necessary, or maybe prove less uniquely useful than originally thought. 

In the end, no option truly supersedes the other. Smaller businesses may take operational leases of newer technology to give them a competitive edge without needing large initial assets, while more established businesses may feel comfortable enough to take leases that end in buying. Whatever path a business chooses, Vorster’s four tips provide the clarity needed make the decision quickly, effectively and without regret.

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