BY: Pash Brar
There is reasoning on both sides of whether to buy a piece of heavy equipment outright or to lease it over a period of time.
When buying equipment outright for cash, there are no further payments to be made and no interest to be paid on a lease. One lump sum payment is given and that’s it; the equipment is yours paid in full. This saves money because of no extra interest being paid and that increases profits significantly up front without a large payment plus interest to be made each month to pay for a lease.
Equipment is expensive whether buying new or used. Some trucks and trailers are over $100,000. Not everyone has large amounts of cash. But if you do and can pay that, you are using a lot of cash to purchase something that is depreciating, or going down in value steadily. That money may be better invested in to something that increases in value, such as a business, commercial or residential real estate, stocks, bonds etc., instead of losing value over time.
There are many who cannot afford to buy a piece of equipment for cash. With a lease, you do not need a huge amount of cash, which opens many doors to a lot of people to be able to afford equipment. You can give a down payment, and make monthly installments to pay the lease off. Lease payments can be written off in your taxes providing tax benefits. A huge sum of cash is not being tied down, so extra funds can be used to invest in something else which may increase in value.
With a lease, you must qualify and have all your paperwork in order. Some find it stressful to put together paperwork. You must also maintain a good credit standing or you may not qualify. A bankrupt person will have a difficult time qualifying for any type of financing.
With a lease you must pay interest. The rate of interest you pay will depend on your qualifications. This interest could add up significantly over time especially if you had a difficult time qualifying for the lease.
If your lease is set up incorrectly, it could cause problems later. A lease where the value of the equipment is always more than the amount outstanding is ideal. This way if the lease needs to be broken, the equipment can be sold for more than the outstanding amount. Also if the equipment is written off in an accident, then the insurance company will give a cheque for the excess value. If the equipment is worth less than the amount outstanding on the lease, then then lessee, or person leasing the equipment, will have to pay the leasing company for any shortages occurred. This amount could be significant so always make sure to put enough down at the start of the lease and purchase GAP insurance to cover deficiencies.
Some leases may have a penalty if you break the lease early. It is best to find out before signing if this is the case. There is usually a residual value as well. This is the amount needed to be paid if purchasing the equipment at the end of the term, or the amount the equipment must be guaranteed to hold in value if trading the equipment in for a new lease or returning the equipment back to the leasing company. If you don’t intend to keep the equipment at the end of the term, leasing is a great way to keep upgrading to the latest available equipment and technology innovations. Just be careful of mileage and maintenance restrictions. There are advantages and disadvantages whether buying or leasing equipment. The vast majority usually ends up leasing at some point, whether it’s a large fleet or a single lease operator. Just make sure your paperwork and taxes are always up to date and good credit is maintained.
Tying up large amounts of cash to purchase equipment is your option, but it takes time to get to the point of having that much cash, and leasing may be a great way to get started in the industry in the meantime.