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Now, the pickings are slimmer and come with higher mileage. You have to consider what a used machine might cost you in downtime, upkeep or repairs versus something brand new.<\/p>\nThe term \u201cheavy metal\u201d is used to describe a genre of ear-splitting, head-banging music. But it\u2019s also a good term for describing the large equipment you must use as a contractor.<\/p>\n
Do you remember that first piece of big iron you bought for your business \u2014 that first zero-turn mower, dump truck or skid steer? There may have been some head-banging involved there, too, depending on how the transaction went. We hope to give you some tips on buying, leasing or renting equipment so you can do it without banging your head … unless you want to, of course.<\/p>\n
Many contractors prefer to own their equipment. Jorge Castaneda, owner and president of Arboristas, a tree care company based in Santa Clarita, California, buys the machinery he uses to trim and cut trees. \u201cThe heavy equipment, like a wood chipper or a chipper truck, a dump truck, a boom truck, those are hard assets that don\u2019t devalue as fast as regular vehicles,\u201d says Castaneda. \u201cIt\u2019s better to buy them new and use them over the long haul.\u201d<\/p>\n
Frank Niccoli used to own a large landscape company in the San Francisco Bay Area. He sold his business in 2013 after 35 years in business. Now he teaches contractors what he\u2019s learned. One of his classes covers how to buy equipment. \u201cOne of the first things my students hear is \u2018The 50 Percent Rule\u2019 \u2014 if a piece of equipment is going to sit idle 50 percent of the time, then it should not be purchased.\u201d<\/p>\n
But there are exceptions to that. \u201cIt depends on what your goals are,\u201d adds Niccoli. \u201cIf you\u2019re planning a growth spurt, you may be able to justify that purchase if your productivity is going to increase because of it.\u201d A good example of this is being able to cut more grass with that new 72-inch zero-turn rider than with your old 21-inch walk-behind.<\/p>\n
Niccoli advises doing a \u201ctrue lifetime cost analysis\u201d of the machine or vehicle you\u2019re considering. \u201cThat includes the cost of the maintenance and replacement parts it\u2019ll need, the per-gallon cost of the fuel and the sales tax and interest you\u2019ll pay on the financing. That\u2019s how you\u2019ll see that a $30,000 piece of equipment ends up costing you $52,000 over its lifetime.\u201d<\/p>\n
A lot of contractors wait until the end of the year to buy equipment. If he finds himself flush with cash at year\u2019s end, his tax advisor may say it\u2019s time to buy something to get the write-off. But Niccoli says this is not the best approach. \u201cYou really should be able to project what your company\u2019s going to be making in the next three months. When owners are surprised they have all this cash on hand, it just tells me they\u2019re not managing that company, the company is managing them.\u201d He continues, \u201cIdeally, you should be able to say, \u2018I\u2019m going to have a surplus, so I should talk to my division leaders and crews and see what kind of stuff I should be investing in\u2019 \u2014 instead of saying \u2018Hey, now I can go get a crane!\u2019\u201d He saw a company do just that. \u201cThe thing just sat there, rusting away. They were trying to get other contractors to rent it from them because they couldn\u2019t utilize it.\u201d<\/p>\n
Finally, before you buy any piece of equipment, Niccoli says you should have your crew members work with it. Many companies will let you demo something for a week. This helps your people get beyond the \u201cshiny new penny\u201d effect so you can get their honest opinions of the machine. And don\u2019t forget to account for the time it will take to train your crew on the new equipment.<\/p>\n
Castaneda stressed the importance of finding a reputable local dealer and establishing a relationship with him. \u201cYou need to be able to trust that brand and that dealer and make sure that you like that piece of equipment you\u2019re buying because you\u2019re going to be using it for a good 10 years.\u201d<\/p>\n
With a good relationship established, Castaneda says, \u201cIf you have an issue, he will go out of his way to resolve it for you. That is critical because for a contractor, time is everything.\u201d<\/p>\n
\u201cHaving a machine go down on a job site is a big deal \u2014 you\u2019re not going to get that job done today. But if you\u2019ve established a relationship with the dealer you bought that piece of machinery from, you could end up getting a loaner. He will even come to your job site and drop it off so you can keep working while he looks into the issue you\u2019re having.\u201d<\/p>\n
What about leasing? Joe Areyano is CEO and owner of Olympic Landscape, Puyallup, Washington, a company that does design\/build, irrigation, landscape installation and maintenance. It employs around 60 people at any given time and generates around $5.5 million a year in revenue.<\/p>\n
Various financing options have been employed over the company\u2019s long history, but the current favorite is leasing. \u201cWe\u2019ve been primarily leasing our equipment and assets, everything from our larger mowers, stand-on mowers, skid steers, excavators and even our trucks,\u201d says Areyano. Considering that a commercial mower typically lasts around 3,000 hours in daily use, mowing eight to 10 hours a day, or the equivalent of about three years, a three-year leasing arrangement makes a lot of sense.<\/p>\n
\u201cWe\u2019ve definitely changed our approach,\u201d he continues. \u201cIt\u2019s only been this leasing effort over the last three or four years. Before, we\u2019d take out loans or pay cash for the assets we bought. Our larger vehicles, like our dump trucks, are primarily on TRAC (terminal rental adjustment clause) leases.\u201d<\/p>\n
Since taking over the business from his father who founded it 41 years ago, Areyano has expanded it by acquiring several different companies and is looking for others. Leasing helps preserve his cash while he\u2019s in expansion mode. \u201cA good, healthy balance sheet without a lot of debt on it definitely helps when purchasing new businesses, whether it\u2019s with a loan or with cash,\u201d he says. He also finds it easier to write off a leased asset\u2019s purpose on his taxes at the end of the year.<\/p>\n
The IRS code allows a lessee to maintain the full deductibility of a leased asset even though there\u2019s a predetermined residual value. Only the bank gets to write off the depreciation, however.<\/p>\n
Mac Braun, senior vice president for agriculture, golf and turf markets at Wells Fargo Equipment Finance, says, \u201cThere are tax advantages to a lease that may be applicable. What you have to do is compare that to your bonus depreciation to see which is more advantageous. In some cases, the lease is more advantageous. But that\u2019s something you need to discuss with your tax advisor.\u201d<\/p>\n
Would Areyano advise leasing to a contractor just starting out? \u201cAbsolutely,\u201d he says. I would say that for any new company leasing is definitely the way to go, especially when you don\u2019t know what projects you\u2019ll have in the future.\u201d<\/p>\n
\u201c\u2018Cash is king\u2019 is an old saying for a reason,\u201d he continues. \u201cYou want to preserve as much cash as you can as a newer company and as an older one. Especially in your starting years, you have less access to cash and less experience in using that cash.<\/p>\n
These days, interest rates are so good, so I would take advantage of those special financing programs.\u201d<\/p>\n
Another benefit to leasing is that you can prevent buyer\u2019s remorse. You have the ability to change equipment instead of being stuck with something you may not use as much as you thought. You might be one to two years into a lease and determine you need a newer or a different machine. It\u2019s much easier to upgrade that piece of equipment if you\u2019ve leased it versus being tied into a purchase.<\/p>\n
There are special programs, too, such as John Deere\u2019s Ultimate Forgiveness Program. \u201cWe want to encourage our customers to lease, so we offer a discount on any damage a returned machine has,\u201d says Angie Harms, tactical marketing planner at John Deere Financial. \u201cIf you\u2019re over or under hours, we\u2019ll forgive some of those. It\u2019s a benefit you also get for being a return customer.\u201d<\/p>\n
Castaneda prefers to lease his pickups and business-developer vehicles, because \u201cit\u2019s better to put a bunch of miles on them, give them back to the dealer and exchange them, so you always have a newer fleet.\u201d<\/p>\n
I asked Ed Roberts, senior vice president, specialty markets, transportation for Wells Fargo, if a contractor would pay hundreds or thousands of dollars more for something under a lease agreement versus a purchase plan. \u201cHe would,\u201d he admitted, but that\u2019s not the whole story. \u201cHe also needs to look at the opportunity cost of that money.\u201d<\/p>\n
For example, he explains, \u201cI can drop $100,000 to buy a truck, or I can lease it and put $3,000 to $4,000 down. If I lease it, I still have $80,000 or $95,000 with which I can fund other business options.\u201d It may cost more to lease, he concludes, but ask yourself, \u201cWould it be better for me to invest in a depreciating asset or go after some new business opportunity that comes up, like the chance to buy out my competitor?\u201d To Roberts, \u201cIt\u2019s better to use that cash to grow my business instead.\u201d<\/p>\n
Renting can be a good option when you need a machine for a certain job but won\u2019t need it all the time. Then, you\u2019d go see someone like Rex Alligood. He works at Ag-Pro Rentals in Quitman, Georgia, where he rents machinery to contractors in Alabama, Florida and Georgia.<\/p>\n
\u201cIf it\u2019s something like a mini excavator that they don\u2019t use every day or a tractor with a trencher on it for a big job, they\u2019ll rent it,\u201d Alligood says. \u201cThat keeps their overhead down because they\u2019re not making a payment on something they only need a couple times a year that sits idle most of the time in their shop.\u201d<\/p>\n
Stan Hoglund, owner of Hoglund Landscape, Fargo, North Dakota, rents equipment from time to time. \u201cIf it\u2019s something I don\u2019t have because I hardly ever use it, like a backhoe, I\u2019ll go rent one just for the day,\u201d he says.<\/p>\n
And some landscape maintenance companies apparently rent everything they use. \u201cWe deal with quite a few landscapers that own very little equipment,\u201d says Alligood. \u201cBecause they have the flexibility to rent things on a week-to-week basis, some of them feel that nowadays they may not need to own anything.\u201d<\/p>\n
This option can work well, but it\u2019s not like it was during the recession of 2008 when lots of used trucks and equipment were available because landscape companies were liquidating their assets. Some of these were great values.<\/p>\n
Now, the pickings are slimmer and come with higher mileage. You have to consider what a used machine might cost you in downtime, upkeep or repairs versus something brand new.<\/p>\n
Your financing decision will depend on your company\u2019s individual circumstances. \u201cThe key is understanding your options,\u201d Braun says. \u201cList all the pros and cons to help you see which type of financing would be a better fit for you.\u201d<\/p>\n
He adds, \u201cIf you like fresh equipment, keeping things under warranty and lower payments, then leasing is a very good option, but if you typically keep your equipment for a long time, and especially if a manufacturer is running any kind of low-interest special or rebate with a conventional loan, buying may be a better option.\u201d<\/p>\n
Whatever options you choose, we hope all of your equipment steers you toward a profitable, headache-free 2019.<\/p>\n
\u201cList all the pros and cons to help you see which type of financing would be a better fit for you.\u201d<\/p>\n
\u2013 Mac Braun, Wells Fargo Equipment Finance<\/em><\/p>\n<\/div>\n When it comes to leasing, there are many different options. Mac Braun, senior vice president for agriculture, golf and turf markets at Wells Fargo Equipment Finance, explains the most common types available to contractors.<\/p>\n Dollar-out: Similar to a loan, you make payments, and at the end of the lease ownership is transferred to you. After leasing a $50,000 dump truck for 60 months, having already paid $49,999, you would hand over the $1 buyout fee and the truck is yours.<\/p>\n Purchase-on-termination: The finance company sets a residual, and you agree that when the lease ends you\u2019ll buy it for that amount. A $10,000 piece of equipment with a 10 percent residual is $1,000. At the end you pay the $1,000 and you own it. The benefit of this type of lease is lower payments during the term.<\/p>\n Fair market value\/operating: The finance company sets a residual, but at the end of the lease you have the option to buy or return the piece of equipment. This type of lease gives a contractor great flexibility with cash flow and is generally less expensive than other leases or conventional financing. The higher the residual the lower the payments.<\/p>\n Terminal rental adjustment clause: These are generally limited to over-the-road equipment. At the end of the leasing term you can buy the item for the residual, trade it in for a new model, keep the lease going by financing the residual or give it back to the bank. The bank will then sell the vehicle. Should the bank realize more than the residual amount in the sale, you\u2019ll get a check for the difference. But should the bank not get the full residual you\u2019ll have to make up the difference.<\/p>\n Exploring all your options will help you get the best value from your next equipment investment.<\/p>\n","protected":false},"author":28,"featured_media":4647,"parent":0,"template":"","main-categories":[32],"class_list":["post-3740","features","type-features","status-publish","has-post-thumbnail","hentry","main-categories-equipment"],"yoast_head":"\nTypes of leases<\/h2>\n
This article originally appeared in Irrigation & Green Industry magazine.<\/em><\/h6>\n
Mary Williams-Villano<\/strong><\/a> is a contributing editor to Irrigation & Green Industry and can be reached at pouncerspy@gmail.com<\/a>.<\/em><\/h6>\n","protected":false},"excerpt":{"rendered":"