ISSUE FOCUS: Options Abound

When Mike Haberl Jr. considers buying a new piece of equipment, he immediately does the math.
   
That’s especially important when contemplating the purchase of big-ticket equipment, like skid-steer loaders, which can easily cost more than $20,000. And Haberl’s company, Prestige Landscape Construction, of Calgary, Alberta, owns nine skid-steers, so doing the math is important for him to make a smart purchase. 

For Haberl, the owner and operator of Prestige, landscape projects drive the decision to buy. “It’s not a matter of ‘I think I need a skid-steer; let’s go out and buy one,’” he says. “You want to resource each project to its capacity with the right piece of equipment. Does every single project we do require a skid-steer? No, not every one does.” Carefully reviewing his company’s numbers and the project at hand can tell him whether he’s going to take on a new skid-steer.
 
While it might sound easy, deciding on renting, leasing or buying comes down to a combination of running the numbers, assessing project needs and forecasting the ability to pay for the equipment in the future, especially during the lean months when cash-flow has slowed.
 
For contractors who want to do it all – from finish-grading with a skid-steer to lawn and nursery installation and maintenance – a wide assortment of skid-steer attachments would be required, says Gregg Zupancic, construction and forestry product marketing manager for John Deere, Moline, Ill. That array of equipment, including the skid-steer and attachments could cost as much at $100,000. That’s typical for many mid- to large-sized landscaping firms, Zupancic says. For that reason, as Haberl says, contractors need to do the math.
 
VERSATILE MACHINES. Sales of skid-steers have increased in the past few years due to new home sales that have fueled the demand for professional landscape services, says Dean Shaw, marketing manager for New Holland, Wheaton, Ill. “This increased demand has landscape companies looking to complete their work more efficiently, which in turn is driving skid-steer and specialty attachment sales.”
 
Skid-steers are likely the most versatile machines for green industry professionals, says Todd Lynnes, skid-steer loader/multi-terrain loader marketing supervisor for Caterpillar, Peoria, Ill. “The machines also help get the job done with fewer workers, which is a plus in an environment where contractors are really challenged to find and keep qualified people.”
 
Skid-steers, whether in a wheel or rubber track form, are the perfect machines for these jobs because they’re easy to transport, are incredibly agile in tight work areas and can drive over finished surfaces without inflicting damage, Zupancic says.
 
Skid-steers can be used for a host of tasks, including lifting and carrying materials, digging, grading and general ground preparation, Shaw says. Post-hole digging, planting trees and trenching round out the typical duties. Skid-steer manufacturers say the machines cost between about $15,000 to more than $45,000, with attachments costing hundreds, and sometimes thousands, of dollars.
 
Because there are a host of jobs that can be accomplished, there are a number of attachments. Other than typical buckets and pallet forks, five attachments stand out as the most-popular in the landscape industry: augers, trenchers, landscape rakes, sweeper buckets and soil conditioners, says Rob Otterson, market segmentation manager for Bobcat, West Fargo, N.D. “Manufacturers are constantly adding new models to fill customer requests,” he explains, “many of which can be used on different types and brands of carriers, further increasing their utilization.”
 
Stump grinders, rotary cutters, combination buckets, sod layers, snow removal attachments and many others can quickly increase a contractor's business. “The contractor who researches and is aware of these additions will be presented with more opportunities to grow his or her business,” Otterson says.
 
In choosing attachments, contractors should keep flexibility in mind. “Contractors should look to purchase attachments that can be used to complete as many jobs as possible,” Otterson says. Nearly every contractor can use a combination bucket and pallet fork on a landscape construction job, he says. A soil conditioner can be used to clear rocks, unwanted weeds, existing turf and create a final grade in preparation for landscaping, planting seed or laying sod. “Trencher attachments are particularly useful for contractors installing irrigation lines and drain tile,” Otterson adds.
 
Skid-steer loaders are typically purchased with between two and four tools, Lynnes says. “A landscape contractor would often purchase an auger and trencher along with a bucket and fork because of the high frequency of their use on most landscape jobs,” he explains.
 
In his estimation, Zupancic says the top five attachments are buckets and grapples, pallet forks, augers, brooms and landscape-type rakes. “These specific attachments give a contractor about 80 percent of the tools needed to finish and clean just about any job,” he says.
 
The number of attachments purchased varies widely by customer depending on their business, says Brad Lemke, director of new product development at ASV, Grand Rapids, Minn. “Buckets, multi-purpose buckets, dozer blades, pallet forks and brush cutters are all very popular,” he says. “With the cost of fuel going up sharply, being able to get more done with your machine can help minimize the impact of those rising fuel costs.”
 
“Just like a car or truck purchase, the cost of a skid-steer is going to depend on the size of the machine and the options chosen,” Lynnes adds.

LEARNING FROM MISTAKES. Industry experts say contractors should do their homework before acquiring a skid-steer in order to avoid any potentially expensive mistakes. “The biggest mistake is generally involving buying the wrong machine for the job – a machine that is either too large or too small,” Zupancic says.
 
“Do your homework,” Shaw agrees. “Make sure to select the machine and attachments that will be needed to do the job. Plan ahead.”
 
Higher-flow hydraulics may be needed for optimum performance for some attachments that may be purchased in the future, Shaw says. By adding this option or others at the time of the machine purchase, money will be saved over having the options installed later, he explains. Before settling on a machine, a contractor should see a demonstration unit in action and test attachments to see if they’ll work for a particular project, manufacturers suggest.
 
Otterson says the types of attachments used will dictate the amount of auxiliary hydraulic flow needed from the skid-steer. Contractors who need enhanced performance with attachments like stump grinders, trenchers, chippers or snow blowers, may need high-flow machines, he adds.
 
“Failing to choose the proper machine or the options may result in a machine that may work fine today but will not meet the requirement for future jobs, forcing the contractor to rent a machine to get the job done,” Lynnes warns.
 
TAKING THE PLUNGE. When it comes to buying, Haberl grabs the calculator. “I think contractors must look at their cost-recovery, first and foremost,” he says. “You can finance a piece of equipment as long as you want. But the question is, at the end of the day, is it making money each and every day you use it? That’s what I believe it has to come down to.”
 
Haberl benefits from operating in a boom economy in Alberta. If he does take on new equipment, he can readily flip it, if need be. “Because we’re very project-driven, we tend to flip units in and out,” he says. “We have done that in the past, where the work was not conducive to the piece of equipment, so we flip it out – outright sell it.”
 
Regardless of whether contractors operate in booming areas or not, they need to think long-term and consider if they can keep up with the payments. “You might be able to make the payment the first 12 months, but what is the longevity of the corporation?” Haberl says. “What work are you trying to go after?”
 
Hartano Tanuwidjaja, merchandising consultant for Caterpillar Financial Services Corp., Nashville, Tenn., says contractors
should consider three questions when thinking about buying.
 1. Does the customer want to own the equipment?
 2. What is the cash flow requirement for the customer?
 3. What is the customer’s tax situation?
 
As far as tax purposes, a contractor who wants to take tax advantage of the equipment depreciation would want immediate ownership, Tanuwidjaja says. “Other times, a customer wants to minimize their monthly payments, make a long-term rental commitment and have a pre-determined purchase option amount at the end of the contract,” he explains, adding that in those instances, a lease might be the better alternative.
 
When buying, Mark Almeter, vice president and regional manager of CitiCapital, West Fargo, N.D., says it’s important for the dealer to understand the contractor’s need for the skid-steer, including the applications, hours and conditions under which the equipment will be used. “Based on this information, the dealer can tailor a lease or financing arrangement that provides the best solution for the customer,” he shares. “The contractor should understand all aspects of the purchase and their financing choice including monthly obligations, options during the term of the financing or lease and any end-of-term responsibilities.” 
 
Customers generally fall into one of three categories when purchasing equipment – cash buyers, financing customers and leasing customers, Almeter says. While cash may be king, paying cash isn’t for everyone. “A cash purchase is often viewed as the least expensive, which may or may not be true depending on the customer’s financial situation,” he explains. “Paying cash up-front can cause significant cash-flow challenges for the contractor. So, while it might feel good to pay something off all at once, depending on the contractor’s situation, it may put a pinch on finances, at least in the short-term.”
 
Contractors may find it better to finance, which can free up cash. “The contractor must be careful however, to match the financing terms to the expected usage requirements so they can avoid owing more than the equipment value at the end of the usage term,” Almeter says. Zupancic adds that contractors who have seasonal businesses can choose financing that includes “skip payments.” Flexible-term financing often benefits contractors working in northern climates, Almeter explains.
 
“Dealers are most likely to provide the fastest and smoothest financing options available,” Almeter says, “but customers always have the option to pay for the equipment or secure outside financing through their own efforts.” Most dealers are able to offer standard financing terms for the equipment purchase, he adds.
 
For Haberl, dealer financing is the way to go. “They can give you different options – they can give you skip programs,” he says. “That, to me, means a lot in terms of cash flow. It’s one more tie to the dealership in relationship building that you can utilize. It is certainly something for us.”
 
“Often, a dealership or manufacturer will have many financing options or special financing programs available at the time of purchase, but a customer doesn’t have to take advantage of them,” Lynnes says, adding that a customer may choose to purchase with cash or open a line of credit instead. “Some contractors may even choose the manufacturer financing to conserve their operating line of credit with their lender.”
 Another financing tip: Since contractors put equipment through its paces due to constant usage, machines often have to be replaced in shorter intervals. Because of this, matching the financing terms to the expected use time is important so contractors can maximize revenue and cash flow, Almeter says. “Downtime means lost revenue, and financing over a longer term forces customers to use the equipment beyond its prime.”

LEASING AS AN OPTION. With interest rates on the rise, contractors are increasingly looking to leasing, Almeter says.
 
Leases are essentially long-term rental contracts, with the option to buy at the end of the term.
 
“Leasing is often more attractive with customers that choose to update their equipment at shorter intervals while maintaining lower payments,” Almeter says.
 
Due to differences in the accounting treatment of a lease, customers should understand their specific needs prior to entering into a lease, he adds.
 
“A popular way of acquiring skid-steer machines today is to rent with a purchase option where up to 100 percent of the rental payments may be credited toward the purchase price,” Shaw says. “Leasing does offer the advantage of a lower monthly payment and may come with the option to walk away at the end of the lease term.”
 
Or leases may allow the contractor to buy the equipment at the end of the term; the option to trade in the equipment; or the option to re-finance and continue to lease the equipment, Shaw says.  
 
Besides interest rate increases, fuel cost increases have also made leasing a more attractive option for contractors, Shaw adds.

LOOKING AT THE SHORT TERM. Experts say renting, of either skid-steers or the attachments, should be used mainly for two reasons: testing out potential equipment to buy or for use on shorter-term projects. “Renting a skid-steer, in my opinion, is for a short-term project – a quick turnaround,” Haberl says. “You’re probably going to spend more money out the door in a two-week period that you will on a month-long lease agreement.”
 
Many contractors buy their most-often used attachments at the time they buy a new or used skid-steer, Lynnes says. “They’ll acquire others as the need them, or even rent work tools for more specialized jobs, or for seasonal work like snow removal,” he adds. “Purchasing a tool means it’s always on hand when needed, but rental allows increased machine utilization and versatility without the investment of owning a work tool that may not be used on a regular basis.” Lynnes suggests contractors rent at peak work times in order to get the most use out of equipment.
 
Renting also allows contractors the chance to explore offering new services, Otterson says. This helps in “determining whether these new ventures fit their businesses with only a minor investment,” he explains. “For instance, they could rent a trencher or vibratory plow attachment on a trial basis to determine whether this is an application they wish to add to their services.”
 
Many companies also offer rental programs where payments can be used toward a future down payment, Zupancic says. “An upstart landscape company may choose to rent for a six-month period of time and then use the rental payments toward a down payment because they are cash-strapped.”
  
Whether it’s buying, leasing or renting, Haberl reminds other contractors that they get what you pay for. “I can go out anywhere and buy a piece of equipment,” he says. “They all operate the same way and perform basically the same functions. We honestly shop and work with dealers because we’re buying service. We want to ensure that we get the service we need for the product we buy.”