Best Practices

Why Heavy Equipment Leasing Is a Good Idea

If you own a construction company, your workers will be unable to do their jobs unless they have access to the right equipment. However, paying thousands of dollars for new or used machinery is not always practical. So, how do you go about getting the right equipment for the job? Heavy equipment leasing.

Leasing is a cost-effective way to acquire construction machinery without spending top dollar to purchase it outright.

Heavy equipment leases are typically classified as either capital or operating leases.

A capital lease (also known as a finance lease) is often a full payout lease with a nominal lease end purchase option. In this lease, you are responsible for maintaining the equipment as well as paying any insurance and taxes related to it.

If you want the benefit of equipment ownership and a low cost purchase option at the end of the lease, you should consider a capital lease. Capital leases also allow you to take advantage of the IRS Section 179 Deduction to write off equipment leases as a tax incentive.

An operating lease enables you to “rent” the equipment for a fixed amount. Maintenance, extended warranties, and insurance may be paid by the equipment’s owner or bundled into a single monthly payment.

Operating leases are a good option if you need to upgrade or replace your construction equipment constantly, or if you want to return the machine at the end of the lease to avoid technical obsolescence.

What are the advantages of heavy equipment leases?

The purpose of heavy equipment leasing is to become more productive—and profitable. Because you only pay to use the equipment instead of owning it outright, you can minimize upfront costs to save capital and open up credit lines. You also have the added benefit of always working with new, cutting-edge equipment.

What are the different types of heavy equipment leasing?

  • 1. Fair market value

A fair market value (FMV) lease is one of the most common types of equipment financing. You can lease the equipment for a few years, and at the end of the lease, you usually have the option of returning or purchasing the equipment. You might be able to renew the lease as well.

FMV leases are an excellent choice for heavy machinery that depreciates quickly. If the equipment value has dropped significantly by the end of the lease, you can upgrade without incurring huge losses.

  • 2. Dollar buyout leases

Dollar buyout leases are a type of capital lease in which you have a high monthly payment than a fair market value lease and a longer lease term. When the lease term expires, you will be able to purchase the equipment for only one dollar.

Dollar buyout leases are often used for equipment that retains its value well over time and acts as a hybrid between a loan and a lease. You may be able to get 100% financing with zero down and fixed payments like a lease, but you own the equipment and it appears on your balance sheet similar to a loan.

  • 3. Wrap leases

A wrap lease consolidates all of your new and existing leases into a single, convenient package. It combines current leases into one agreement and adds any additional equipment you require. 

This way, you will have less paperwork to deal with. Plus, you will have a single lease payment rather than juggling multiple monthly payments.

  • 4. Sales and leasebacks

Purchasing equipment often involves tying up capital funds and repaying a loan over several years. However, you cannot always put off your capital purchasing needs for such an extended period. In that case, you might have to convert a purchase into a lease.

If you have new equipment, you may be able to do a “sale and leaseback,” allowing you to sell the equipment to another company. You can then lease the equipment back and keep using it for the project.

What’s the takeaway?

Heavy equipment leasing is a great way to save money on equipment costs for your construction business. Before you decide whether leasing is the best option for you, take into account your upcoming projects, evaluate your equipment requirements, and determine if leasing makes the most financial sense for you.