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To rent or to buy

A number of factors come into play when deciding how to spend money on equipment.

Debbie McClung | February 25, 2013

Not long ago purchasing compact equipment wasn’t financially viable for a number of landscape contractors. Projects dried up, cash reserves were thin and equipment loans were difficult – if not impossible – to secure. Rental answered a very critical need, and it proved its value again as one of the first industry segments to bounce back from the recession.

However, a fleet expansion decision takes careful consideration and planning. While rental remains a strong alternative to ownership, an improving economy is helping contractors gain the confidence to buy compact equipment again. Rental and acquisition strategies offer unique benefits for different stages in an operation’s life cycle, and both are demonstrating positive trends.

Sales of compact equipment are steadily increasing. According to an annual study performed by KHL Group, sales of construction equipment by the world's 50 largest manufacturers grew 25 percent in 2011 to $182 billion, surpassing the previous high of $168 billion set in 2008 before the financial crisis.

On top of that industry record-setting increase, an analysis of the rental equipment industry by Yengst Associates shows that the rental industry is the largest buyer of compact equipment. Shares of unit sales to the rental market in 2011 is at 55 percent penetration and increases to more than 60 percent for specific categories of compact equipment, such as track and skid-steer loaders and excavators.

As you evaluate where your business and equipment needs stand today with where you want to be positioned in the future, it’s important to weigh your options by looking at considerations such as jobsite factors, machine size, attachment versatility and capital resources. “With compact equipment, there are times when ownership will emerge as the best solution to equip your company, and other times when it clearly makes more sense to rent. The final decision boils down to being able to complete the work you’re performing in the most efficient and affordable manner possible,” says Mike Fitzgerald, loader product specialist with Bobcat Co.

Jobsite factors. When trying to make a decision about how to add a compact track loader, skid steer loader or compact excavator to your fleet, manufacturers typically recommend starting with the scope of work. Is there an expectation that the length of a contract and the volume of work will sustain a commitment to a long-term purchase that would be better served with an acquisition? Perhaps the need for a machine or attachment is based on a relatively short-term project and it’s most feasible to pay only the fees associated with a rental arrangement?

Fitzgerald points out that the economy is directly impacting the rental or purchase decision in another way. In the boom days before the recession, many contractors had larger projects, as developers ramped up residential and commercial construction, road building and mall projects. It was easy to take on larger jobs that subsequently needed larger equipment, but changing project tasks can routinely dictate the need for a different size of machine.

“Many projects that are being done now are rework and remodeling. We’re seeing home additions and outdoor home improvements instead of new homes, so the work is in tighter quarters. If you used to complete work with a larger model of compact equipment, you might need a machine with a smaller footprint to get into these confined areas. Rental may be the best option if you only need a machine for that one project or a few times a year,” Fitzgerald says.

Jobsite conditions may provide the most compelling reason to rent or own. Perhaps you’re a contractor who performs site prep and finish work on roadways and paving projects using skid-steer loaders, but you won a bid for a project in different terrain. If the ground is going to be softer, muddier or sandier, it might be the time to consider renting a compact track loader. Likewise, a landscaper who regularly does dirt work and owns a track loader may have a contract on a solid surface where a skid-steer loader may be more conducive to productivity.

Certain landscaping applications provide equipment owners more confidence that a compact track loader, skid steer loader or compact excavator will be used to its maximum capacity for the life of the unit. For instance, nurseries or landscape centers typically find it easier to purchase a loader because they have established retail loading needs and stocking patterns that dictate having a machine on a continual basis.

A general landscaping contractor may be clearing and prepping a jobsite one week, installing an irrigation system another week or planting trees and rolling sod yet another. Although utilization is more varied and somewhat less predictable in some landscaping applications, tracking a machine’s usage and demand between multiple jobsites may reveal justification for purchasing to meet long-term needs

Attachment versatility. The considerations associated with rental or purchase of a machine also extend to attachments. One of the greatest advantages of attachments is their ability to increase utilization of existing capital investments without requiring a large cash commitment.

If selected appropriately, attachments can provide more versatility and profitability for the dollar compared to some other equipment acquisitions. In the initial stages of evaluating the attachments that can meet project needs or assist expansion efforts, focus on tools that will provide the best return in the shortest time frame at the least possible cost.

If your company has already invested in a skid-steer loader, compact track loader or a compact excavator, then the proper attachment will strategically position your operation to diversify its services. A well-paired attachment rental for one or all of those machines can improve project control, delay the purchase of a dedicated piece of equipment and — more importantly — provide the versatility to open up new revenue sources.

With some manufacturers’ attachments, compatibility extends across loader and excavator lines for greater efficiencies, economies of scale and justification to purchase. Some have also been designed to vertically integrate with the machine’s electronics and hydraulics. While each type of loader or excavator has its own set of performance benefits in certain conditions, some of today’s attachments are interchangeable to provide flexibility and convenience for an equipment fleet that needs to be responsive to multiple jobsites.

As your operation has more frequent use of an attachment and schedules are not conducive to getting that attachment transported to your jobsite on a timely basis, or the location is not easy to access, then you may be better off to make a purchasing investment.

However, it’s also smart to evaluate the potential point that an attachment becomes such a significant part of a business that it transitions into the acquisition of a dedicated machine. “A good guideline to follow is if you are using a specific attachment 50 to 75 percent of the time on an individual loader or excavator, then you may want to consider a dedicated machine. Your loader or excavator will then be available for additional work on the jobsite,” Fitzgerald says.

Capital resources. In the final analysis, determining the right time to rent or to buy is a business decision – one that is based on overall equipment needs, cash flow, cash reserves, the availability of financing tools from manufacturers or conventional lending institutions.

Economic forces continue to play a key role in a company’s equipment evaluation. Capital is not as easy to secure as it was before the recession. Projects are not as large, nor as plentiful as before when contractors were more risk-tolerant. These conditions have escalated a hybrid approach to equipment that lets contractors test the purchasing waters. Industry experts are seeing a growing interest in rent-to-purchase option agreements (RPOs). This acquisition strategy allows contractors to allocate a portion of a rental fee toward purchasing a machine or attachment, or return it at the end of the rental period.

Without question, purchasing a machine carries a greater commitment that typically includes insurance, taxes, licenses, registration, maintenance, operating expenses and transportation fees. Depending on a contractor’s financial position, it may be difficult for them to justify this total cost of ownership compared to a flat monthly rental rate for a machine that is delivered to a jobsite.

A company’s tax implications must also be scrutinized. “Always consult your financial advisor or tax professional to determine if a purchase is a smart decision. While you can deduct rental payments as a business expense on tax returns, there could be tax incentives for purchases, such as advanced depreciation,” Fitzgerald says.

As you can see, the decision to buy or rent is entirely dependent upon your company’s situation. The most important thing is to take the time necessary to fully evaluate these and any other associated considerations. The pace of business is picking up and changing daily. You might be surprised to learn that what you decide for a project may change before the job is done.

The auhor is a writer with Two Rivers Marketing.

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