Should you lease or finance equipment? Here’s what to consider
Balancing your equipment needs with a tight budget can be a challenge, and sometimes it means making tough decisions. Should you buy or lease new equipment, or continue to operate your current equipment? With each option, there are trade-offs.
Making do with your current equipment eliminates the cost of new equipment, but you still have the potential for higher maintenance expenses and more downtime. On the other hand, buying new equipment gives you the benefit of operating efficient and reliable machines, but it ties up cash you may need for other purposes. If new equipment is what you need, financing may be a good solution to bridge the gap.
Before you make any decisions, it’s important to start with a well-thought-out acquisition plan. Weigh your current stock of assets against your needs, then determine if you have the capital budget and cash available to cover those needs. If not, financing can help you get the equipment you need now to do the work you need to do, even if you lack the budget to purchase it outright or have better places to invest your cash. In some instances, it may be possible for you to generate significant savings immediately by upgrading to new, more efficient equipment that saves labor and other resources.
Financing can work to your advantage in other ways too. For instance, you may be able to consolidate multiple units into a larger purchase that could potentially qualify for “volume incentives” from the manufacturer. You could also bundle the equipment, installation costs and services into a single payment that meets your budget. Plus, financing expands your purchasing power, allowing you to maximize the dollars you have available on a predictable schedule.
If you are a tax-supported agency, you may have to consider the process and requirements you will need to follow to finance equipment purchases. Is financing required to be competitively bid and/or bid separately from the equipment procurement? Toro has several national cooperative contracts available that not only allow you to purchase equipment on a pre-competed contract but also include provisions that may allow you to lease the product by leveraging these contracts.
Finance option 1: leasing
If you decide to finance all or some of your equipment acquisition, leasing is an option. A lease is similar to a long-term rental. You acquire a piece of equipment and use it for the term of the lease. When the time is up, you typically have the option to renew the lease (month-to-month or for a fixed term), purchase the machine at fair market value, or return it.
Leasing is an operating expense, but the payment is usually tax deductible for tax-paying enterprises. And currently, leased items are not included on your balance sheet so mid-term upgrades may be less onerous. However, this is changing to a “Right of Usage” model within the next 2 years, so it would be wise to consult with your finance department or tax preparer to see if the changes would impact you significantly.
In a nutshell, leasing gives you the most equipment per dollar of payment, or the most “bang for your buck.” You don’t pay for the entire machine; only the portion that you use. You also get the flexibility to renew or purchase it later. Just be sure to read all the contract provisions and know the requirements of the lease for equipment care and maintenance, turn-in condition, hours of use, etc.
Leasing is usually best for higher-usage items you plan to cycle through more quickly, for example, when you want to have the latest technology or avoid the higher maintenance portion of the equipment life cycle. In the tax-supported space, it may work particularly well for “enterprise” functions that generate user fees and income.
Finance Option 2: conditional sale contract
A Conditional Sale Contract (CSC), also called a Buck Out Lease, is an agreement where the buyer takes possession of the item and pays in installments, usually over a term of months or years. With a CSC, you own the machine, subject to a security interest by the finance company. It’s listed as an asset and liability on your balance sheet, so the depreciation and interest expenses may be deductible for tax-paying enterprises.
A CSC is often subject to more volatility based on the CapEx dollars you have available to acquire or upgrade your property and equipment. It’s best for long-life assets you plan to keep for an extended period of time. Examples include aerators or tractors[DASH HERE]things you may not use every day but are still mission-critical for certain tasks.
Within the CSC category, there is also a municipal financing option with some tax-created nuances that can result in savings for tax-supported municipalities and “Special Districts.” The end result is the same: you own the equipment. This option is very structured and imposes more rules to comply with. In addition, an “Opinion of Counsel” letter is typically required from the customer to assure legality and compliance with all related requirements.
More things to know
Whether you choose a lease or CSC, the upfront investment is usually minimal. The first payment is often all that is required in advance. You can even include installation costs, sales tax and other installation expenses in the financed amount to further reduce your upfront cash outlay.
You can also rest assured that manufacturers’ warranties are unchanged, whether you buy a piece of equipment outright, lease it or put it on a CSC. Additionally, if you choose to buy an extended warranty plan or service/maintenance contract, it can be included as part of your monthly payment.
When it comes to choosing between finance companies, the important things to look at vary between a CSC and a lease. If it’s a CSC, compare the interest rates to the length of term offered. Are the fees reasonable? If it’s a fair market value lease, compare the payments, turn-in requirements and added fees.
For any enterprise, the key always comes down to cash flow. If you want to buy equipment and choose a CSC, you might opt for a longer term to keep the payments lower. If you have the resources and well-qualified technicians to keep older machines running, you may opt to do that as well. And if you have a facility where users expect the most pristine and safe conditions, you may choose to lease equipment so that you can roll out new models at regular intervals and take advantage of having the latest technology, less downtime and a reduction in repair and maintenance expenses. No one solution works for everyone; it’s a matter of balancing needs with desires and available resources.
Regardless of the financing method, it’s also important to have a champion or advocate on your staff to guide financing decisions and approvals through bureaucratic hurdles. This can help you stick to your plan and acquire equipment in a timely manner when it’s needed. Let’s face it; everyone is busy and a quick “no” may eliminate some work, but an advocate needs to enlist some thought and consideration on what is really in the long-term best interests of your enterprise.
The main takeaway here is that financing is just another tool to help you execute your business plan more effectively. Even the most thorough budget plans can change due to sudden unforeseen circumstances. That’s when financing can help you continue with your strategy without being constrained by the limitations of the immediate resources at hand.
Your local distributor sales professional is an excellent resource to learn more about your financing options and find answers to your questions. Your distributor can also connect you with the manufacturer’s finance partners if you need more technical details.
Paul Danielson is Senior Manager, Financial Marketing, for The Toro Company.
Perspective from a financing rep
Tim Borger is a municipal lease representative for TCF Equipment Finance, a division of TCF National Bank, Sugar Land, TX. Here he answers our questions:
How do I determine if financing or leasing equipment is a viable option for my facility?
Having been involved in municipal financing for over 30 years, I always ask, “What is the biggest issue facing your municipality?” By far, the answer I hear the most is “money,” or lack thereof. There are more needs for municipal entities than there is money available. It would only make sense to spread the cost of your equipment needs over a period of years to fit more product into your budget.
Are cash payments upfront usually required?
The short answer is no. Lease/purchase financing is normally 100% of the cost. Obviously, there are exceptions to that rule. Sometimes a project may include a large percentage of soft cost, such as, labor and licensing. A financial institution may want to limit their exposure on such items and ask the client to cover a portion of those costs. However, the general rule is financing the total cost.
What should I look for to compare financing/leasing options from different companies?
The first question you need to ask yourself is “What am I trying to accomplish?” Are you looking for the longest term to make your payments lower, are you trying to spend the lease amount on interest dollars; do you want to delay your first payment into the next fiscal year? Know what you are trying to do before contacting a financial institution, then, when you speak with them, see if they can offer you the solution you need. Also, tell them what you are trying to accomplish. This is what a finance person does and they may have a better solution for you that accomplish the same issues you are trying to solve.
Also, and this is one of my pet peeves, do not judge the best deal by who offers you the lowest interest rate. Numbers can be “massaged” to look like it accomplishes something it doesn’t. A company may offer the lowest interest rate, but it isn’t the best deal. You must look at the total overall cost of a transaction. Are there outside fees that are calculated in the interest rate? These are often called “ancillary fees” by the finance company. They can be financed, but they don’t have to be calculated in the interest rate.
Do these programs change how warranties work?
No, not at all. The finance company is simply paying the invoice on the buyer’s behalf. The warranty is between the vendor and the buyer. The agreement between the buyer and the finance company has no effect on the vendor other than who cuts the check.
Perspective from a turf manager
Dean Whitehead is director of grounds, Christopher Newport University, Newport News, VA:
I have been fortunate enough over my 17-year career to work at three different places: a semi-private golf resort, a private college, and most recently, a public university. So I have seen and participated in three different types of equipment acquisitions.
I will focus on my current position at Christopher Newport University (CNU), a public university of 5,000 undergraduate students in Virginia. When I arrived at CNU in 2008, it didn’t take me long to realize that we had equipment issues. I determined this by asking myself these questions:
Do we have the right type of equipment?
Do we have enough equipment for current maintenance standards?
Do we have enough equipment for future development and maintenance standards?
The answer to all of these questions was “no” and most of my equipment needs were for transportation, snow removal, and turf maintenance. So, I compiled a list of immediate and future needs, prioritizing them knowing I would have to make decisions based on funding allocations.
Next, I examined my budget and realized that we historically were allocated an average of $25K per year for equipment purchases. Some of my needs could be fulfilled with that amount each year, but some could not. In the past, the university also had extra funds that had to be used prior to the end of the fiscal year, but I knew I could not count on that funding. I quickly began to explore my options, which led to a conversation with the university’s budget director. It was there I first learned about the State of Virginia’s Master Equipment Lease Program. This lease program has been publicly solicited and awarded so the terms and conditions are already set. I knew the university used this program for other equipment acquisitions so I just had to convince my manager and budget director to reallocate my department funds.
This program is very different than most lease programs. We do not have a buyout at the end nor do we have to provide any upfront funds unless we want to. We basically finance the piece of equipment for less than its life expectancy.
Using this leasing program was an easy decision and great option for me. This option allowed me to immediately obtain the equipment needed and, from July 2012 through February 2013, I was able to lease approximately $151,000 worth of equipment, all on payment terms of 7 years (all equipment has a life span of at least 8 years). In descending order from most to least expensive: Toro Multi-Pro 5800 sprayer; Toro 3505 rotary mower; Ford F350 truck; four HPX John Deere Gators with snow blades; and one JD XUV 550 4-passenger utility vehicle. I have already been approved to lease a Kubota 6060 tractor beginning in 2018 on a 5-year term. The budget director requested a 5-year term so the obligation was shorter in case we ever had a financial crisis, and it also allows me more flexibility in replacing equipment. I am excited for 2018 because I get to start thinking about the 2019 replacements.
I did not get concerned about the warranty period vs. the lease period; however I did purchase an extended warranty on the sprayer. My extended warranty purchase was not because of the lease period, but after conversations with my salesman, I learned certain items would be expensive to repair on it. I place a lot of value in the relationship with my salesman for the regional distributorship. He and they have always supported us well during or outside of the warranty period so to me that is worth more than any warranty on paper. I also have a great mechanic that has 30 years of experience who can spot a problem developing and repair it quickly.
I have already mentioned the flexibility in purchasing a lot of equipment over a period of time. But there are also a few hidden benefits. By making the right “pitch” to the administration and gaining their approval, they have made commitment to you and your department. They have committed those funds to your department’s success for a least the duration of the lease. Unless the circumstances are extremely bleak, those payments will be made and you will be able to keep the equipment. So with their commitment you have to make good on your promises and put the equipment to good use.
I believe that once you get an amount committed for leasing, it eventually becomes a natural part of your budget. My original equipment account for purchases was $25K and that was moved to fund the equipment leases in 2012, which left me with nothing for small equipment replacements. So in 2013 we shifted $5K into that account for small equipment purchases. That account has now grown back to $25K and that is where I will pull some funding to lease the Kubota tractor.
At the end of the day, leasing as well as any purchase, requires commitment and trust between our managers and us so that we are successful in providing the best playing surface for our athletes.