CONSTRUCTION EQUIPMENT Smart Spending

Everyone knows you have to spend money to make money. This is true in the landscaping industry, as you cannot provide services to your clients without first investing in the proper equipment. But what is the best way for a company to purchase a pricey piece of equipment like a skid-steer loader? The decision is one that should be made with consciousness and consideration.

According to Lawn & Landscape research, 11 percent of contractors purchased a skid-steer in 2006, spending an average of $27,580. With 14 percent of contractors planning to purchase one this year, skid-steers are becoming leaders among today’s most highly-used landscape equipment, as the skid-steer’s versatility and productivity appeal to businesses looking to diversify their fleets or make better use of their time and man power. There are many ways to purchase a skid-steer, from renting-to-own to leasing to financing to buying outright, and each option should be taken into account to ensure landscape contractors are making the right decision for their businesses.

“Every business situation is unique, and contractors should explore all of the purchasing options available to them before making a choice,” says Barb Hockey, Caterpillar Financial Services Manager for the Midwest region, Nashville, Tenn.

REASONS TO RENT. When investing in a skid-steer, many contractors worry about cash flow. Newer companies usually don’t have the financial flexibility that

established companies have, so renting-to-own is an option that allows them to gain the productivity of a skid-steer without parting with a large amount of money all at one time. With a portion of the money going toward ownership of the machine, the company will have something to show for their investment at the end of the rental. According to Troy Price, vice president of financial services for Case/New Holland, Racine, Wis., renting-to-own is a common way to purchase a skid-steer, followed closely by leasing. Most rentals are conducted through equipment dealerships or rental houses. 

Jeff Rak, president of Land Creations Landscaping based in Columbia Station, Ohio, acquired his company’s first skid-steer 12 years ago from a rent-to-own company. Through this method, 80 percent of the money paid during the six-month rental period went toward the purchase of the skid-steer. If at any time during the rental Rak thought the skid-steer was not the right machine for his company, he could simply return the skid-steer and payments would cease.

“The rental-toward-ownership option was easy because we didn’t have that drastic commitment,” Rak says. “We had the ability to test out the machine and make sure it was right for us.”

Rak recently purchased a mini-excavator also through the rent-to-own option. Now a more established company with better cash flow, Rak had set a goal that as soon as his company had enough money set aside to compensate for an entire year of rental payments, they would go ahead and officially purchase the machine.

“Once we hit that goal we knew we couldn’t justify making payments on it for the rest of the year,” Rak explains. “If you have the income available, you might as well purchase it instead of renting and save money on interest.”

Renting a skid-steer or renting with an option to buy is ideal for landscaping companies that don’t have a regular use for the machine, Hockey says. “In general, if the customer’s need is for less than 24 months, a short-term rental or rental-with-purchase option might be the best choice,” she adds.

Also, contractors should be sure to match the renting terms to the expected usage requirements so they can avoid owing more than the equipment’s value at the end of the usage term, and also to avoid being  stuck using out-of-date machinery.

“Matching the terms of the rental agreement to the expected use is very important for landscape contractors in order to maximize revenue and cash flow,” says Mark Almeter, vice president and regional manager of CitiCapital, the financing provider for Bobcat, West Fargo, N.D. “Downtime of older equipment means lost revenue, and renting over a longer term forces contractors to use equipment beyond its prime.”

LOOKING AT LEASING. Leasing is an option similar to renting; however, landscape contractors should be aware of some important differences. Contractors who lease skid-steers must agree to conditions for the use of the machine, annual hours of use permitted and what condition the machine must be in when the lease is up and the machine is returned.

According to Larry Self, senior director of leasing, Case/New Holland, Racine, Wis., conditions of equipment leases can vary widely, from 12 to 60 months, and from 300 to 1,200 hours per year. If a lease’s initial specifications are not met, additional charges and fees could be added to bring the machine into proper condition. Most manufacturers agree that if contractors work closely with the manufacturer, extra fees should be kept to a minimum.

“When leasing, payments are usually custom-designed to match the customer’s budget,” Self explains. “By structuring the lease around the customer’s cash flow, penalties and fees are minimized.”

According to Price, leasing provides some advantages not offered by other financing options, particularly for businesses that do not want more assets on their books. For example, leasing requires no down payment and minimal fees upfront. Leasing also provides the opportunity to use the latest equipment while making comparatively low payments, the ability to customize your payment schedule based on the cash flow needs of your business and, in some cases, tax deductions. Because leased machines aren’t the property of the lessee, expenses related to equipment use are considered operating expenses and are 100 percent tax-deductible. Contractors should consult their tax advisors for advice on this topic. 

Like the rent-to-own option, lessees have the option to purchase the equipment at the end of a lease, or they can return the machine to the manufacturer or extend the lease. “This flexibility allows contractors to better manage their expenditures and gives them the ability to keep newer equipment in their fleets, which may result in fewer maintenance expenses,” says Bill Connolly, manager of product market development for John Deere Credit, Johnston, Iowa. 

Anthony Vitari, area manager for Yardmaster, Painesville, Ohio, says his company used its first skid-steer when it was founded about 25 years ago, and now owns six machines. In the past, Yardmaster leased skid-steers under two-year agreements. The company used the machines primarily for snow removal in the winter and for various jobs in the summer, but soon found their needs for the machine surpassed what the lease agreement permitted.

“While leasing a skid-steer, we realized we had a need for it on a routine, daily basis,” Vitari says. “After the two years was up and we had to give it back we always hoped we hadn’t caused too much damage or gone over on our usage hours. Also, it was odd to put money into the skid-steer and have nothing to show for it at the end,” he says.

Vitari says that leasing is a smart option for small businesses that don’t have a daily use for the machine. But regardless of the situation, researching the options prior to making a purchase is a must. “First make sure your company has a suitable backlog of work to justify owning a skid-steer,” he suggests. “Then research the available machines and attachments – really do some shopping around.”
 
ALL OR NOTHING. Purchasing a skid-steer outright can be a hassle-free method for companies in the financial position to do so, as 100 percent of the purchase cost is paid upfront, eliminating monthly payments. Also, paying the entire cost of the machine at once avoids the accruement of interest, which can be substantial if interest rates are high. However, this is not feasible or beneficial for all landscape companies.

“The businesses that buy equipment outright typically are the ones that have a strong need for equipment and, most importantly, the available cash,” Price says.
 Kathy Krubert, manager of M.J.B. Services, Elkhorn, Wis., says her company bought its first skid-steer about 15 years ago and now owns three, all of which were bought outright. “The owner of the company purchases all of our machines outright because he just doesn’t prefer leasing them,” Krubert says. “It’s a personal preference about what works best for your business.”

A main downfall to cash payments, Connolly says, is investing such a significant amount of money can impact a company’s ability to meet its ongoing business needs and pay for necessities such as fuel, machine maintenance and parts, employee wages and other operational expenses. “While using cash will not create a long-term liability on a contractor’s balance sheet, it may reduce the cash available to invest in other, more profitable, areas of the business,” Connolly explains.
 
FINANCING FIGURES. The last, and perhaps the most traditional, method of purchasing a skid-steer is financing. The terms of acquiring a machine this way will vary depending on the strength of the contractor’s credit and the financing company they work with. Often times, manufacturing company representatives work with contractors to help them determine which option best matches their needs. Financing options require a down payment as a starting point and then monthly payments from there.

“Most people don’t have the ability to write a check for a piece of construction equipment and choose to finance it through some type of installment loan financed by the equipment manufacturer’s finance company or by a local bank,” Connolly says.

The opportunity to build equity is one benefit of financing, and the shorter the term of the installment loan and the more money put toward each monthly payment, the quicker the company can built it. Equity helps improve a company’s credit and can also be used as a down payment on future equipment purchases.

“Once the equipment is acquired, the contractor has the benefit of making monthly payments that generally better match cash flow while also building equity in the machine,” Connolly explains.

By financing a skid-steer through a manufacturer, contractors can take advantage of the types of support offered to them, such as flexible equipment loans and protection plans, parts and service credit card accounts, a range of equipment insurance products and the flexibility of “skip payments.” The skip payment feature was created to accommodate periods of slower cash flow due to the seasonal nature of the landscaping industry. “Selecting the financing method that’s right for your business can mean the difference between succeeding or failing as a business,” Price says.

Rak’s company purchased a skid-steer through a manufacturer’s financing department and took advantage of the support offered to him. He was able to communicate his company’s needs and financial situation before making a final purchase. “They really seemed to understand our situation,” he says. “They know that we are a seasonal business and they’re flexible and creative with the ways they can serve us.”

According to Rak, another perk of working through a manufacturing company was the ability to demonstrate numerous machines to find the one that worked best for him. “Once we tried out different machines and really figured out why we wanted a skid-steer, we realized that we have a use for it every day,” he explains. “The machine is really paying for itself.”