Purchasing equipment is a major expense that contractors can use to expand services or increase capacity. But, paying for large equipment purchases with cash is not reasonable for most contractors. With the cost of some pieces of equipment, it could take contractors years to save up enough cash to pay for them. Luckily, there are several options to finance equipment purchases.
We’re going to look at four ways that contractors can finance the purchase of construction equipment which will allow them to expand their services and/or increase their capacity.
4 ways to finance construction equipment
1. Equipment rental
Many contractors use equipment rental companies to get the equipment they need for short-term projects. Rental companies provide a wide variety of construction equipment for contractors to rent for short periods of time, from days, to weeks, to months. The agreement is pretty simple, contractors pay the rental company for use of a piece of equipment. Maintenance and repairs are generally covered by the rental company, except those caused by negligence on the contractor’s part.
Before renting, contractors are subject to a credit check and have to sign a rental agreement for each piece of equipment. Rental rates will vary depending on the size and cost of the equipment and the amount of time it’s being rented for.
Pros
- Pay for equipment only when you need it
- Rent for short periods of time, even half a day
- Try equipment before you buy it
- Maintenance and repairs are covered by the rental company
Cons
- Can be more expensive than purchasing equipment
- No guarantee a specific piece of equipment will be available when you need it
2. Long-term equipment leasing
Similar to equipment rental, contractors can enter into equipment leasing agreements with equipment dealers or rental companies. These agreements are usually for longer periods of time than short-term rentals. Contractors pay a monthly fee for use of the equipment and maintain control of the equipment for the life of the lease.
At the end of the lease, the contractor can return the equipment, renew the lease and get a new piece of equipment, or purchase the equipment at market value. There’s no down payment required, but the dealer will check both personal and company credit.
Pros
- Equipment is always available and is replaced on a regular basis
- Less expensive than renting or purchasing, when leasing for a longer-term
- No down payment
- Maintenance is performed by the equipment dealer or rental company
- Cost of equipment is a tax deduction through section 179
Cons
- More expensive than purchasing
- Can’t return the equipment when work slows down
- Continual expense — so plan your cash flow accordingly
Learn more: The Pitfalls of Equipment Leasing for Contractors
3. Equipment financing
Equipment financing is a loan used to purchase equipment that operates similar to a vehicle loan. The financing is backed by the equipment as collateral, so it’s cheaper than leasing or renting and easier to get than a traditional bank loan.
Terms of the loan will be dependent on the life of the equipment, your credit rating, and the price of the equipment. A down payment may be required, but 100% financing is available at a higher cost. If you fail to make payments on a regular basis, the lender can repossess the equipment. Financing can be acquired from independent banks, specialized loan companies, or direct from dealers. Once the loan has been paid off, you own the equipment.
Pros
- If you use the equipment on most or all of your projects, this is a good option
- Equipment is always available
- Cost of equipment is a tax deduction through section 179
Cons
- You are responsible for cost of maintenance and repairs
- If you don’t have a good credit rating, interest rates can be high
4. Lease-to-own options
Some dealers will provide a hybrid loan-lease agreement or lease-to-own agreement, sometimes called an equipment financing agreement. In these agreements the cost of the equipment is rolled up into monthly payments that are paid to a lender, not the equipment company.
At the end of the lease period, there are options to purchase the equipment depending on how much has been paid during the lease. Terms include purchasing it for a dollar or a percentage of the value. You can also return the equipment at the end of the lease to renew with another piece of equipment. This is a good option for equipment that becomes obsolete quickly.
Pros
- Less expensive than renting
- Equipment is always available
- Cost of equipment is a tax deduction through section 179
Cons
- Can’t return the equipment when work slows down
- Continual expense – need to plan cash flow
Make sure you get the best deal for your business
Contractors have multiple options when it comes to financing the purchase of equipment that will help them expand their businesses.
Shop around for equipment lenders to ensure that you get the best deal. Most will check your credit history and rating, so expect to pay more if you don’t have good credit. Make sure that you plan ahead for regular payments to ensure you have adequate cash flow.