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If you are looking to grow your construction business you will often need to add and upgrade machinery in order to satisfy the demand for your services and complete the jobs you have tendered for.
A lot of construction equipment comes with a hefty price tag and that means it is sometimes not possible to buy the equipment outright using cash in the bank, which is where financing options come into play.
Here is a look at what you need to consider when financing construction gear and an overview of the various options available when you are in the market for the sort of equipment that can help you boost your turnover by taking on bigger jobs.
Deciding whether to lease or buy
When you are looking to purchase construction equipment one of the key decisions you will have to make is whether you purchase outright or sign a leasing deal that gives you the option to own the item at a later date.
As you might expect, there are advantages and disadvantages attached to either option.
Some of the pros of buying construction equipment outright include the fact that you should be able to get some level of tax relief on your purchase and you can use the item as collateral or equity in your business.
You are also free to sell the equipment as and when you want without any restrictions and you don’t have any usage limitations to worry about, which can sometimes be the case when you are leasing the item.
The disadvantages of outright ownership
Before you decide to buy rather than lease any construction equipment it is also advisable to consider the disadvantages attached to this option.
The equipment will age and fall in value over a period of time and as the equipment depreciates in value, you will end up recouping a lot less money than you paid for it when the time comes to sell.
As the outright owner, you will also be solely responsible for any maintenance and repairs that are needed during the lifetime of the equipment.
When is it right to buy?
There are certain standard types of construction equipment that don’t really change that much despite technological advancements.
Therefore, if you are going to buy a digger, for example, you will know that it will be used heavily and over a long period of time with only regular maintenance and some repairs to think about.
If you are running a profitable construction business and you can afford to buy the equipment outright without damaging your cash flow, it can sometimes make sound sense to buy rather than lease.
The case for leasing
Leasing construction equipment does give you a range of options and has certain advantages that are worth evaluating before deciding which option is best for your business.
You can lease equipment on the basis that the lessor is responsible for maintenance and repairs, taking the hassle away from you and giving you the comfort of knowing that everything is covered within the leasing payment.
However, the leasing company will normally incorporate the cost of maintenance and repairs into the monthly leasing cost, so you are simply spreading the cost over a period of time rather than facing individual bills as and when required.
The advantages attached to leasing equipment include the ability to upgrade items with relative ease and without any significant financial outlay.
Leasing costs are also often tax deductible, so it might prove more tax-efficient to lease.
Points to consider about leasing
You might find that leasing construction equipment turns out to be more expensive than buying when you take into account the interest payments and the price being quoted for the item in the first place.
Most lease agreements tend to last between three and five years, so you could end up paying for certain types of equipment longer than you want to.
In addition, you may have to find a balloon payment (final payment as a purchase option) at the end of the lease term, meaning you have to hand the item back even if you still need it if you can’t find the amount requested as the final payment.
You might also be limited in regard to what equipment you can lease, giving you less choice compared to going out and buying exactly the model and specification you want.
When it might pay to lease
Although there are no hard and fast rules when it comes to when leasing wins over an outright purchase, there are are a few general pointers that might help guide you toward making the right decision for your business.
If you are going to use a certain piece of construction equipment extensively and it will be in use for at least 60% of the time, it might be better to buy rather than lease.
Leasing is a flexible option that allows you to enjoy the use of construction equipment that you may not use all of the time but need on a fairly regular basis.
This means that is you have a contract to fulfill that requires certain specialist items that you may not always use during your normal contract work, leasing could turn out to be a cost-effective solution to meet your short-term equipment needs.
Renting is another option
Finally, there is a third option to consider over outright purchase or leasing your construction equipment.
Renting avoids any long-term financial commitment, although the obvious downside is the fact that this is often the most expensive option and you won’t enjoy the benefits of tax deductions or be able to claim any depreciation.
Ultimately, whether you decide to purchase, lease, or rent, will be down to your financial status, what your specific equipment needs are and what your future order book looks like.
It is always worth getting some input from your accountant or financial adviser before making your final decision, as the acquisition of construction equipment can be an expensive business, so you want to get it right.
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