AEMP Equipment Management: Buy, Rent, or Lease - Understand All Your Options Before You Decide!
Thursday, July 13, 2017
Posted by: AEMP
By Phil Picone, Regional Equipment Manager, Granite Construction
When it’s time to acquire equipment, the question whether to purchase, rent, or lease must be answered in the best way possible for your organization. Capital budgeting, equipment specifications, life cycle cost analysis, financial and risk management strategies, and employee training are all part of the buy-rent-lease decision. These must be understood, analyzed and reviewed to make the best decision for your company.
How can you know which acquisition method is the best for your situation? Before you can begin to decide, you need to answer several questions. How long is the equipment needed? Will there be any major downtime gaps in its use? How many hours are you planning to use it in a year? Are there specific machine preferences, or other special requirements? In what geographic area will the equipment be used most of the time (this affects outfitting decisions for climate, terrain, and resale)? What cash reserves or other capital does the company have available for purchases? What about the training required for operators and technicians on this equipment? You need to have a clear understanding of your organization’s financial situation, the reasons for acquiring the equipment and how it will be maintained.
Next you must understand the options available for equipment acquisition and how these different methods could benefit your organization’s specific situation.
Purchase – This is the most straightforward method, but be sure to look at equipment warranties, performance guarantees, service agreements and possible buy-back options that may be offered. When purchasing equipment, always take into consideration the salvage value or what the machine will be worth when you’re finished with it. This is a major factor in your total ownership costs, and should always be included in your calculations.
Straight rental – This method is normally used for shorter term needs with no gain towards equity. Shop around for pricing and service – be sure to let your suppliers know if the equipment will be needed for longer time frames to get the best rate. If you’ll use the equipment longer than 6 months, start looking at Rental Purchase Options (RPOs) to protect your equity for any changes or potential future needs.
Rental Purchase Options (RPOs) - These are rentals with a purchase option in a specified time frame which the monthly rent is applied to the purchase price. I always ask for 100% applied (you can get this most of the time). Suppliers will charge an interest rate to the monthly payment but most will offer 0% for a certain amount of time. If needs and/or company cash dictates ask for longer rental periods before purchase (I have for up to 18 months and longer) with 100% applied to the purchase but still understand the cost of the interest charges. **Be aware of repairs/services not included or under warranty – if not paid for upfront, they will accumulate and are charged at the time of purchase.
Lease – Leases are normally offered through a financial institution to keep your ownership costs to a minimum for a specified period of time, normally 24-36 months. You can ask for possible purchase options at the end. Be aware on leases that you will be responsible for excessive hours above the specified amount and specific machine wear (percent of tires/tracks and possibly implement pins/bushings). Always read and understand the contract and the costs for which you could be liable. It may change your decision and make other acquisition methods look better!
**For Rentals/RPOs/Leases - I ask for oil changes to be included with the normal payment. Always estimate the hours per month you will need the equipment and ask for that amount to be included in the rate. Normally, suppliers will accommodate and it helps you avoid getting stung with overcharges at the end of the term. Also, make sure to get on/hire and off/hire inspections done with pictures – this will help control unexpected bills for damages after the machine is returned.
Once you understand these acquisition options, always research all you can about the machine you’re acquiring and its vendor. Equipment reliability and vendor service dependability should rate high in your calculations. Do the math to determine what your total ownership cost per month (basically your monthly payment plus taxes, registration, insurance, etc) will be and add in the estimated operating costs (maintenance and repairs) to determine which method is best for you and your situation.
Keep these steps in mind when you’re acquiring equipment, and you can navigate the complicated buy/rent/lease decision!