Capital equipment investment is essential for engineering and construction firms. Like other capital-intensive industries, each company has to consider their unique situation and circumstances when determining how to finance their equipment investments. Whether you buy, rent or lease equipment, each option comes with certain benefits and financial implications.
Take a look at the following case studies to see how the companies made their decisions.
The Right Mix
The situation: A prominent Midwest construction firm specializing in highway and street construction was in the market for new “yellow iron” equipment to replace an outdated fleet and increase efficiencies to meet contractual project deadlines.
After running through various scenarios, they determined that purchasing all of the equipment would have depleted cash balances and forced the firm to utilize their line of credit in the middle of construction season, which alarmed the firm’s senior management team. Also, due to future economic uncertainty -- reflected in most industry forecasts -- the firm did not want to over-commit to specific assets.
The decision: In the end, the firm decided to use a mix of options, determining the best financing methods for each piece of equipment given the company’s fleet and financial status. For road machines and industrial tools, leasing provided options to package various equipment based on projected payment streams and end-of-term needs. Leasing a portion of the equipment provided lower monthly rental payments and lower up-front costs, further conserving the customer’s cash and working capital. Leasing also allowed the customer to access more expensive and efficient models of equipment that would not have been affordable to purchase outright.
The company also used cash to purchase specific assets that were consistent in their fleet, had very little technological and efficiency improvements year over year (which still left adequate liquidity on their books) and that they knew they had the maintenance capabilities to protect their investments.
A Good Time to Buy
The situation: An experienced firm focused on commercial construction won a large contract to build a high rise in a big city. The building was expected to be completed in two years and the company had an extensive pipeline of other projects.
In the past the company had leased many pieces of equipment. This time, however, they considered buying construction equipment they knew they would likely need for future projects. Initially, the company did not want to put money down to finance the purchases. But with interest rates so low, the company believed financing, via a loan structure, would allow them to preserve the capital necessary to run the business while potentially having payments lower than rental expenses.
The decision: The firm’s intuition was correct. After conducting a thorough cost analysis, the company determined renting would be more expensive -- especially on a longer job -- than taking out a loan to purchase the equipment.
The equipment they were planning to purchase (including wheel loaders, excavators, skid steer loaders, forklifts and dump trucks) had excellent resale value, so they knew if the project pipeline dried up, the company would easily be able to resell it. Plus, the company knew they could use much of the equipment on their upcoming projects.
A Fresh Look
The situation: A midsize construction company in Wisconsin reached the point where its aging fleet and considerable backlog limited its executional capabilities. Since the economic recovery began, the company relied on renting equipment to satisfy contractual deadlines and quickly meet its growing demand. A surplus of idle equipment and inconsistent workflow made renting the best option in the past.
However, after continued growth in both projects won and investments in human capital, the company knew it was time to explore new options.
The decision: The firm used various lease products/structures to acquire equipment they were less familiar with, including boring equipment and cranes. Through leasing, the company was able to immediately upgrade parts of its fleet while gaining cash-flow benefits in the short term.
The company also decided to purchase outright the more stable and familiar equipment, including aerial lifts, forklifts and wheel loaders.
Striking the right balance
It’s always a good time to review your equipment portfolio and determine whether you should buy, lease or rent the equipment you need (or some combination of the three). It’s a matter of what’s best for your company and your current situation.
Tom Sbordone, Managing Director, BMO Harris Equipment Finance, contributed to this article.
Shahrokh Shah is Head of the Engineering & Construction Group at BMO Harris Bank. Jud Snyder is President of BMO Harris Equipment Finance.