Construction equipment sits at the center of an important question: Should subcontractors rent or buy the tools they need? Conventional wisdom might lead you to believe owning is a better strategy than renting. After all, the monthly cost of renting construction equipment is typically 2 to 4 times more than the cost of financing it—and, at the end of the day, you don’t have an asset to show for it. However, in many scenarios, renting offers benefits that can offset the impact of higher monthly payments, such as greater flexibility, reduced maintenance and transportation costs.
That said, the choice isn’t always straightforward. One method isn’t necessarily better than the other – one may simply be a better fit for your situation. Before making a decision on whether to purchase or rent equipment as a construction entrepreneur, it’s vital to examine the total costs associated with ownership, as well as the benefits, and weigh this against the pros and cons of renting. In this article, we’ll explore those factors and how subcontractors can navigate them.
The question of whether to rent or own your equipment comes down to two things:
- The size and available cash flow of your construction company
- The type of construction projects you specialize in.
If you’re a larger company with the available resources to store, maintain, and transport equipment to and from a job site – buying may be the right option for you. The reverse is true if you’re a smaller, growing company. Renting equipment may be a better option so your cash isn’t tied up in assets that don’t directly contribute to the growth of your company.
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6 Factors to Consider When Deciding Whether to Rent or Buy Equipment
Before making your decision there are a few important items you should consider. Let’s break these down and discuss how each could affect your decision:
Individual Project Needs
The details of a project will heavily influence the type of equipment that you’ll need access to. For example; if you specialize in concrete, you may want to purchase your concrete mixers, pump trucks, and drum rollers. This equipment is essential for the success of your job and would most likely be cost-effective to purchase.
On the other hand, if there are certain projects that you would only take on a few times a year, you may tie up too much capital into that asset by purchasing.
Although renting offers you the freedom to only pay for the time you’re using the equipment, owning may give you more flexibility to use the equipment on your own schedule without worrying about availability issues.
When you’re thinking about your individual project needs, here’s a few things you should consider:
- Duration of the project
- How quickly you need access to the required equipment
- How often you’ll be doing this type of project and;
- Cost of equipment storage
Transportation and Logistics
Rental companies will transport equipment for you, so if you need to move equipment from one job site to another, assess the costs of moving it yourself, then crunch the numbers to determine if it’s more cost-effective to rent.
For example, say it costs you $800 each time you transport your forklift, and you need to move it three times in a month for a total of $2400, but it only costs $1500 per month to rent it. Why not avoid that extra cost and rent instead? What may seem like a high monthly fee could save you in the long run.
It’s not only important to factor in the cost of transporting equipment from job site to job site, but also the implications of needing certain pieces of equipment at multiple sites simultaneously. You might have several projects going at the same time that all require a number of boom lifts. In this case, renting or a combination of owning and renting, would help avoid any logistical delays that might result from having to transport equipment to different job sites in a short amount of time.
While some rental companies might require you to handle daily upkeep, they are typically responsible for scheduled maintenance and repairs. If you own your equipment, it’s your responsibility. Do you have the financial capacity to employ technicians who will keep the equipment in good working order, handling both ongoing maintenance and unexpected repairs? If so, how does that cost compare to the cost of renting the equipment instead? Something to keep in mind: when purchasing equipment, extended warranty plans can help offset this hidden cost of ownership.
Renting equipment is considered an operational expense, while equipment you own is a depreciable asset. Both are eligible for business tax deductions. However, with depreciation, contractors also have the option of utilizing section 179 of the tax code, which allows you to accelerate the benefits of depreciation, significantly lowering your current-year tax liability versus depreciating the asset over time.
Type of Equipment Required
Unsure of what type of equipment is the best choice for your growing business? If you need specific equipment for a project ASAP but haven’t decided which manufacturer or line is right for you, renting can help you make a more confident purchasing decision before making a long-term financial commitment.
Purchasing construction equipment might be the right choice for you—but based on your circumstances, renting might also make financial sense as well. Before deciding, look at the bigger picture to discover the total cost, and benefits, for your business.
Equipment Budget and Impact on Cash Flow
Last, but certainly not least, a vital consideration in whether to rent or buy is how each option will impact your cash flow. With purchasing, you’ll have the option to finance or pay cash. While financing the equipment is more cash flow friendly, you’ll still need to factor in the cost of financing the equipment, such as:
- Finance charges
- Down payments
The down payment could be sizable, so you’ll have to see how these combined fees stack up next to the rental cost.
How will the decision to purchase or rent equipment impact your cash flow?
Whatever route you take, conduct a thorough financial forecast to determine how the expense will affect your cash flow—and, in turn, your ability to take on more, bigger projects that will grow your business. If cash flow is holding your business back from success, consider contractor financing options to purchase the resources you need to keep your business moving forward.
At Billd, our team has a deep understanding of the construction industry, and we know that cash flow can be a major hurdle to business success. That’s why we created a project-based financing solution to help contractors purchase materials upfront, tackle that big new job with confidence ,and then enjoy a little breathing room with our 120-day repayment terms. Discover how Billd can help you do business on your own terms.