Many landscaping entrepreneurial dreams have started behind the controls of a piece of equipment. And for almost every landscaper, equipment is one the largest expenditures on the books—usually just behind employee wages and benefits. And how a company manages its equipment expenditures can have a dramatic impact on cash flow and profit. The decision to buy, lease or rent construction equipment is typically made based on utilization, but there are several other factors to consider in the process, such as the need for customized features and brand preference.
According to Jonathan Ferguson, Terex regional sales manager, the decision to buy, lease or rent equipment needs to be evaluated on each piece of equipment and reviewed on a regular basis. “As landscaping companies grow and evolve with new service offerings, they have to determine the most cost-effective and efficient ways to get a job done,” Ferguson explains.
“For example, a landscaper who starts off maintaining turf for residential and businesses may get asked to landscape flower beds,” he says. “After doing a few of these with hand laborers and a wheelbarrow, they will quickly realize how much more efficient it is to use a skid-steer loader or compact track loader to move material. Now, they must decide to buy, lease or rent that unit. Based on short-term and long-term forecasting, that decision can vary a lot for a growing business.”
With today’s low interest rates, buying is likely the lowest out-of-pocket option for landscape contractors, but this option may not produce the best return-on-investment.
“To determine if purchasing equipment is the right decision, a contractor needs to estimate the utilization rate for a machine,” Ferguson says. “If it will be used between 65 to 75 percent of the time year-round, then buying is the best choice. Most landscapers will not achieve those levels of utilization unless they specialize in landscape design/build, hardscaping or snow removal.”
Other reasons to consider buying equipment need to be carefully evaluated, too. “Many contractors have a brand preference or want a specific machine model with extra options,” Ferguson explains, pointing out that compact size is one of these options. “Contractors with those types of preferences usually plan to hang onto machines for a while, which will make up for low utilization rates further down the road.”
Buying equipment does have advantages. The first one is it helps reduce an organization’s tax obligations through asset depreciation. Insurance, repairs, taxes and interest can be written off at tax time. Buying builds equity, which is why it’s important to buy a machine with a high resale value.
Of course, there are a few drawbacks to take into consideration before buying a piece of equipment. Financing a purchase will tie up capital costs that could be reinvested in other areas of the business and could help spur faster business growth. Buying is a larger financial obligation than renting or leasing, and usually it requires a down payment that could put a strain on small business’ cash flow. Parts, service, insurance, transportation and storage expenses must also be considered.
“The most popular lease options for compact construction equipment are three-year/3,000-hours and five-year/5,000-hours,” says Ferguson. “Since the average landscaper won’t put that many hours on a machine in a year, leasing usually doesn’t make sense for them. However, larger landscaping companies that have several operators may choose to lease because it will help them do a more effective job of managing the cycle for replacing equipment. They will always be operating new machines, which will reduce downtime and help minimize maintenance and repair expenses.”
For the contractors who do lease, Ferguson encourages them to look into an extended warranty. “It will help reduce any unplanned expenses and help the company better manage its finances,” he adds.
Demand for leasing has been down in recent years. With low interest rates on equipment purchases and competitive rental rates on compact equipment, leasing usually only makes sense for larger or specialty machines that rental stores do not stock or for companies that have high utilization rates but would like to always have the latest equipment models.
Many financial institutions offer flexible payment terms to contractors, allowing them to make payments during busy times and then reduce or eliminate payments during the slow part of the year. Lease payments are also tax deductible.
Leasing is a good option for contractors with credit issues or a company that has not been in business long enough to establish credit. Since less money needs to be financed, most lenders will be more lenient on their requirements. However, leasing usually carries higher interest rates, making the cost of operation higher.
For growing landscape companies and organizations that do not use construction equipment on a daily basis, renting is almost always the best choice. Machines can be rented by the hour, day, month or year, and the rental contract usually covers routine maintenance and transportation expenses, which can significantly reduce the paperwork for busy owners/operators. Renters are also required to carry insurance and are liable for any damage repairs.
To ensure that all of the rental costs are covered by a job, Ferguson recommends that contractors secure rate information from their preferred rental store before bidding on a job. “With renting, a landscaper should always be able to get type and size of the machine needed for a particular project,” Ferguson adds. “This rental advantage will create efficiencies and help the contractor control profitability on every job.”
It is also important to find a rental partner that caters to the specific needs of landscapers. These locations should carry a wide range of compact track loaders, compact excavators, skid-steer loaders and attachments. However, it is unlikely that any of a rental store’s equipment fleet will come with extras like turf tracks or tires. If those types of accessories are important for a landscaper’s business, buying or leasing are the best bet.
The quality of the equipment in a store’s rental fleet is also important to consider. “Since compact machines are usually the most utilized machines in the yard, even newer models tend to have high hours and are potentially abused by other renters,” says Ferguson. “That’s why it’s so important to inspect the condition of the equipment before renting it.”
Landscapers should keep track of how often a type of machine is being rented. For extended periods of time, renting will cost more than buying or leasing. And extras like attachments can further increase out-of-pocket expenses.
The right decision
When it comes to managing equipment expenditures, there is no universally correct answer. Buying, leasing or renting all have advantages and drawbacks, which is why it’s important for landscapers to regularly evaluate their needs. The right balance will help small and large landscaping companies continue to grow and be successful.