When residential, commercial and public sector buildings are on the upswing and contractors find themselves taking on more projects, many construction business owners find themselves in need of new or updated equipment to meet increasing demand.
Even during the best of times, however, there are several factors that should be weighed before making an equipment purchasing decision.
Like most construction business owners, John Ring, president of Tennessee Contractors, Inc., has learned from experience when the time is right for new equipment. Having been in the construction business all of his life, Ring has developed a knack for determining what equipment he needs when and perhaps more importantly, what kind of financing makes the most sense in each situation.
"A lot of variables factor into a decision to get a new piece of equipment," said Ring, whose company focuses primarily on residential construction. "Demand, which can vary seasonally, what kind of jobs we have lined up and how many hours we have on our existing equipment all have to be taken into consideration when deciding whether to add or upgrade equipment."
Another big factor to consider is how to structure financing for each piece of equipment in order to maximize profit. For example, Ring's current fleet of vehicles includes ten trackhoes, two bulldozers and two backhoes, to name a few. Ring owns some of his equipment, some is leased, and he rents a few pieces that are primarily used in the summer.
"Ultimately, I like to own most of my equipment, but there are specific times when it makes more sense to rent, and leasing gives me the flexibility to pay for equipment over time and still have the option to purchase it at the end of the lease," said Ring. "It's important to get as much profit as I can out of each piece of equipment, so we weigh all of our financing options very carefully."
The Benefits Add Up
There are many benefits to equipment financing, such as giving contractors access to the equipment they need when they need it without a large outlay of cash. Equipment financing can help contractors respond quickly to new jobs with minimal documentation and red tape; often, credit applications can be approved within an hour.
Some finance packages include extended warranties, insurance and maintenance, which add value for contractors by enhancing buying power, offering greater flexibility and providing convenience. Others make it easy to add or upgrade equipment as needed, and all financing options make it easier for contractors to accurately forecast the cash requirements for equipment.
Equipment financing is a strategic business decision and should be considered carefully. Because factors such as cash flow, interest rates, tax status and equipment use are important parts of the equipment financing equation, it is best to include an accountant or tax advisor in the decision-making process.
Regardless of the size of the construction company or the type of equipment needed, one thing is certain: There are a wide variety of equipment financing choices. From leases and loans to rental and outright purchase options, it is important to do your research before signing on the bottom-line.
Rental Purchase Agreement
In today's interest rate environment, one of the most popular finance options among contractors is the rental purchase agreement. With a rental purchase agreement, the contractor rents the equipment either month-by-month or for a predetermined amount of time, typically between three and twelve months. In many instances, a portion of each monthly payment accrues as equity in the equipment, which can be used toward the purchase of the machinery at the end of the rental agreement.
With a rental purchase agreement, a contractor can obtain a new piece of equipment, often with just an advance monthly payment and the liability of the rental length.
"A rental purchase agreement is a great option for a contractor who needs a piece of equipment to start a job that hasn't
