Construction equipment is a large expense for business owners.
These machines can help you become productive and profitable or can take away working capital that could be used for other needs, making it difficult to get ahead. It’s important to know your financial options when looking at acquiring equipment for your company. Below we look at the benefits of leasing and how it might help your company become more productive and profitable.
Leasing can be the most financially advantageous way to operate. It provides maximum cash flow and equipment flexibility. A lease payment is considered a taxable deduction on your profit/loss statement, whereas on a purchase you can only expense the interest. You can also pay for equipment out of your operating budget rather than your capital reserves, allowing you to use capital toward other investments or equipment opportunities in order to grow your business.
To determine if a lease is right for your company, look at your financial profile to determine how your liabilities compare to your assets and whether you have the capital for a new purchase or, if not, perhaps leasing equipment would be a better avenue to take. Another factor to look at is if your projects call for the same equipment for about the same time frame, then leasing would be ideal because you can determine a fixed expense over the next 12 to 36 months.
Once you’ve decided that leasing is the way to go, you then need to look at your lease options. There are two types of leases: a capital lease and an operating lease. An operating lease is treated like renting, payments are considered and the asset being leased stays off the balance sheet. In contrast, a capital lease is more like a loan; the asset is treated as being owned by the lessee so it stays on the balance sheet. The qualifications of these two types can vary from state to state so your accountant can advise on which one is best for your company.
There are many leasing payment advantages. Up-front costs are generally low. There are some lease plans that require little to no money down and sales tax is paid over time in a lease as part of the lease payment. Leases also have lower monthly payments than if you purchase a new piece of equipment with a loan. With a loan a person will have to pay for the full price over a term for the equipment. With a lease the person gets the full usage of the equipment, but only pays part of the full price with a residual on the end of the term. A residual is a balloon amount or a significant percentage of the selling price. Most importantly, a lease will allow flexible payment options. Payments can be tailored to match your usage of the equipment, accounting needs or revenue pattern which will allow you to maximize usage and minimize your cost of operation.
When your lease term is up you’ll have three options: buy the equipment, return it, or renew the lease. Buying the equipment allows you to take full ownership of the equipment. If one decides to return the equipment it could be due to the contract/job is completed at the end of the lease or there is a need for a lease on a new machine that is more advanced. Lastly, if the machine has worked well but you need more term then re-leasing could be a possible option. Leases will also allow you to change or upgrade your equipment at the end of the term, so you can always have the current technology for better productivity.
Leasing can provide, depending on the circumstance, a 100 percent tax deductible operating expense. Both lease options have varying tax advantages. Consult your accountant regarding the nature of deductions for your situation.
There are many benefits of leasing construction equipment. With any large finance decisions its best to start by consulting with your accountant and determine if a lease is the right option for your company.
Jonathan Loyless is the assistant manager of finance and A/R manager at Hyundai Construction Equipment Americas Inc., and works out of the U.S. Headquarters in Norcross, Ga. He has more than 13 years of construction/agriculture equipment industry experience.